How To Run A Thriving Busness

1st edition
How to Run a
Thriving
Business
Strategies for Success and Satisfaction
by Ralph Warner
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NOLO
1st edition
How to Run a
Thriving
Business
Strategies for Success and Satisfaction
by Ralph Warner
FIRST EDITION
OCTOBER 2004
Editor
RICH STIM
Book Design
TERRI HEARSH
Proofreading
SUSAN CARLSON GREENE
Index
THRSE SHERE
Printing
DELTA PRINTING SOLUTIONS, INC.
Warner, Ralph E.
How to Run a Thriving Business: Strategie for Sucess and Satisfaction/ by Ralph
Warner.
p. cm.
Includes index.
ISBN 1-4133-0104-5 (alk. paper)
1. Small business--Management. 2. Success in business. I. Title: Thrive and prosper. II.
Title.
HD62.7 .W374 2004
658'.022-dc22
2004055213
Copyright 2002 and 2004 by Ralph Warner.

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Acknowledgments
Believe it or not, this book took me four years to write, during which time I was
frequently diverted to other Nolo tasks. Im not sure I ever would have found the
willpower to finish had it not been for the encouragement of my production
assistant Susan Cornell. I am also indebted to Susan for many good ideas.
My friend Rich Stim was an inspired editor, who made many substantive and
creative suggestions. The result is a much-improved book.
Nolos inimitable researchers, Stan Jacobsen and Ella Hirst, contributed much
valuable material to this book, allowing me to at least occasionally back my
opinions with fact.
Huge thanks to Terri Hearsh, who designed this book. Terri's sharp eye spotted
several errors and omissions, allowing me to fix them with no need to be
embarrassed by conscientious readers.
Finally, just as this book was going to press, George Miller introduced me to the
wit and wisdom of Richard Kinky Friedman, of The Texas Jewboys. My life will
never be the same.
Table of Contents
Introduction
1 Build a Meaningful Business
How a Tiny Business Took on the Texas Legal Establishment ............................... 8

How to Make Your Business Meaningful .................................................................. 17
2 Choose a Business You Care About
Plan for the Long Haul .................................................................................................. 32
How to Stay Interested in Your Business ................................................................. 40

Fire Yourself/Hire Yourself ............................................................................................ 47
3 Understand How You Make a Profit
Never Be Vague About Money .................................................................................... 53

Getting a Quick Plan on Paper ................................................................................... 56
4 Start on a Shoestring
Why Small Is Better ...................................................................................................... 71

Spending Money Wisely ................................................................................................ 79
5 Get and Keep a Competitive Edge
Convincing Customers That Youre Special: An Overview .................................. 88

What Makes Your Business Special? .......................................................................... 93
Keeping Ahead of the Competition ........................................................................... 99
6 Innovate Now and Forever
Invention ........................................................................................................................ 109

Copying .......................................................................................................................... 113
Serendipity ..................................................................................................................... 116
A Case Study in How Good Ideas Surface ............................................................ 122

Making Innovation a Continuous Process .............................................................. 127
7 Target Your Customers
Be Specific ...................................................................................................................... 143

Go After Both Novice and Experienced Customers .......................................... 149
Dont Forget Your Current Customers .................................................................. 152
8 Market Your Business Creatively
What Advertising Canand CantDo ...............................................................158
Other Downsides of Advertising ............................................................................. 161

Marketing to Your Target Audience .......................................................................... 177
9 Hire and Keep Good People
Dont Hire Casually ..................................................................................................... 183

Dont Hire Problem Employees ............................................................................... 187
How to Hire Top People ............................................................................................ 191

Keeping the Great People You Hire ........................................................................ 199
10 Drive a Modest Car
Drive a Modest Car .................................................................................................... 216

Lead, Dont Dominate ................................................................................................. 220
Credit Is CheapSpread It Around ........................................................................ 225

Dont Become Lazy ..................................................................................................... 227
11 Dont Work Overlong Hours
The Importance of a Sane Schedule ........................................................................ 232

Planning to Work Less and Make More .................................................................. 238
12 Learn to Live With Luck
The Perils of Good Luck ............................................................................................ 248

Coping With Bad Luck ................................................................................................252
13 Pay Your Bills Early
The Benefits of Paying Bills Early ............................................................................. 260

What to Do When You Must Pay Late ................................................................... 267
14 Embrace Your Best Competitors
Why It Makes Sense to Cooperate With Your Competitors ............................ 273

Your Competitors Are Your Natural Friends ........................................................ 274
Your Competitors Can Be a Source of Business ................................................. 276

Working for Your Competitors ................................................................................ 278
Your Competitors Will Help Define Your Reputation ........................................ 279
If You Cant Say Something Nice
.................................................................... 280
15 Dont Buy a Franchise
Franchises That Are Good Deals ............................................................................. 284

The Problems with Franchises .................................................................................. 285
Evaluating a Franchise ................................................................................................. 293
16 Sell Services, Not Goods
You Can Keep Start-Up Costs Low ........................................................................ 300

You Can Keep Marketing Costs Low ...................................................................... 303
You Can Set Prices at Profitable Levels ..................................................................306
Retail and Other Nonservice Businesses That Work ......................................... 309
17 React Quickly to Bad News
Act Quickly on Bad News ......................................................................................... 318

Fix the Problem, Change Direction, or Quit ......................................................... 319
How to Cut Expenses ................................................................................................ 328
Index
Introduction
Skate to where the puck is going to be, not where it

has been.
Wayne Gretzky
unning a profitable, life-enhancing small business cant be as

tough as, say, climbing Mt. Everest without oxygenafter all,
we all know many average souls who have done it. At the
same time, we know the great majority of small business start-ups are
kaput before they reach their fifth birthday. So if making a comfortable
living as the owner of a business you are honestly proud of is a realistic
goal, how come so few people accomplish it? And more important, what
do you need to know to happily and profitably trek to the top of your
personal small business mountain?
For more than 30 years, Ive led Nolo, a small publisher of self-help
law and business books that began in the corner of a bedroom and now
employs almost 100 people and publishes hundreds of books, plus
software and a website full of free legal information. Along the way, Ive
concluded that the so-called secrets to small business success are not
really hidden at all. Most of the key things small business owners need to
get right are out in the open, where anyone whos paying attention can
HOW TO RUN A THRIVING BUSINESS
spot, understand, and embrace them. As long as you are savvy enough to
develop a customer-focused enterprise you truly care about, which at the
same time is designed from the start to produce a substantial profit, youll
succeed. And if, in addition, your business finds a way to engage the
hearts and minds of its customers and employees in an effort to make
even a small slice of the world a little bit better, it will thrive.
Sound easy? Not so fast. Building a prosperous business you, your
customers, your employees, and even your competitors respect will take a
lot of effort and, usually, at least several or more years. But its something I
can help you learn how to do.
Many of the lessons I have learned at Nolo and discuss here are
directly at odds with the advice youll most often read in the business
press. In fact, I believe that to truly thrive and prosper, you often must
turn conventional business advice on its head. For example, I believe the
entrepreneur who regularly puts in 60 or 70 hours per week is more likely
to fail than the one who gets the job done in a normal workweek. This
puts me at odds with much of the business press, which routinely features
entrepreneurs who proudly brag that their success is the result of working
their fingers to the bone. Too bad that none of these profiles point out an
owner who more sensibly designs her business so she can work a 40hour week, by learning to substitute smarts for hours and to delegate key
tasks, both key skills highly predictive of success. In addition, because the
person who works a shorter week will have enough time and energy to
cope with lifes many other important concerns, she is far more likely to
avoid owner burnout and stick with her business over the long term, itself
a huge, but seldom remarked on, predictor of entrepreneurial success.
At first glance, a couple of my prescriptions for success, such as
Drive a Modest Car or Pay Your Bills Early, may seem almost trivial.
Certainly you wont find them featured in most business school courses.
Nevertheless, I hope to convince you that embracing these habits will be
INTRODUCTION
far more significant to your long-term success than would be acquiring

many flashy business skills, such as teaching yourself how to install a new
computer network or even mastering a double-entry bookkeeping system.
Thats because Im convinced that if you alienate your employees by
flaunting your success, or engender distrust and anger throughout your
businesss creditor network by habitually paying bills late, you will recover
little by keeping a great set of books on a state-of-the-art computer, a task
you would anyway probably be wise to delegate.
Some of my other advice, such as Understand How You Make a
Profit, may at first appear so obvious as to hardly bear discussion. Not so.
Too many new entrepreneurs, full of enthusiasm and vision, fail precisely
because they never understand what it will take to make their business
truly profitable. All too often, their moneymaking plan consists of little more
than opening a shop, restaurant, consulting firm, or other small business
and hoping that at the end of the month theyll sell enough so that the
bottom line will be printed in black ink. Sorry, while an entrepreneurs
own belief that all will go well is undoubtedly an asset, optimism is not a
business plan. Long before you open your doors for the first time, you
must be able to explain in a paragraph or two exactly how and when
your small enterprise will make substantial money.
Let me also point out what this book is not designed to accomplish.
Specifically, it does not cover the many important day-to-day skills that go
into running any small business, including, among many others, accounting,
information management, legal organization, and inventory tracking. Books
such as Small-Time Operator, by Bernard Kamoroff (Bell Springs), The
Small Business Start-Up Kit, by Peri Pakroo (Nolo), and Legal Guide for
Starting and Running a Small Business, by Fred S. Steingold (Nolo) are
among the many essential small business titles that will help you get up to
speed in these areas. But again, as important as it is to master practical
business skills, its my strong belief that mastering the keys to success I
discuss here will have far more impact on your businesss core effectiveness.
Ive drawn my sometimes counterintuitive theories about how to
succeed in small business both from my years at Nolo and by studying the
successes and failures of other entrepreneurs. Out of both personal
curiosity and a determination to run Nolo business better, Ive paid close
attention to how others approach critical entrepreneurial problems. Ive
watched as a small minority of brilliant businessowners have learned to
pick a business with a competitive edge, imbue it with a sense of purpose, keep it innovative and fresh over many years, and target and inspire
employees to be loyal and productive. In fact, understanding what makes
excellent small businesses hum has become a bit of a hobby. Whenever I
encounter a seemingly successful enterprise Im unfamiliar with, whether
it involves helping contractors reduce workers compensation premiums,
plucking ducks for hunters, patenting new plant varieties, or running the
busiest hair salon in town, I immediately want to puzzle out what makes
it tick financially. And I dont mean the myriad day-to-day details that
keep the busy in all businesses, but the core entrepreneurial facts that
position the particular enterprise to produce a good profit year after year.
Often, Im disappointed. Given their core costs for things like rent and
salaries, and their anticipated sales volume and unit profit margins many
will never earn enough to justify their owners time investment and
personal commitment.
But not infrequently I encounter businesspeople who clearly understand how to design an efficient and profitable operation. Recently, for
example, I met Philip, an urban animal trapper I called when raccoons
tried to turn my lawn into a mud pit. Looking at Philips business, I
immediately saw he had discovered a much-in-demand, albeit unusual,
service, which he could provide to a large local audience for a good
price. And best of all, his overhead was rock bottomhe needed little
INTRODUCTION
more than a trunk full of humane livetraps, an answering machine in the

corner of his living room, a bag of cat food, and knowledge of the ways
his prey behaved. Because Philip had worked for years as a city animal
control officer, he knew how to catch raccoons and other suburban pests
such as skunks and possums. Perhaps even more important, he was
thoroughly familiar with the affluent neighborhoods subject to raccoon
depredations where customers would pay well and usually upfront for his
service. Voil, I thought admiringly, Philip is in great shape to further
develop a business that will succeed over the long term. Sure, like all
small business owners, Philip would be wise to take other steps discussed
in this book, such as diversifying his business by developing innovative
new services (deer-proofing yards, perhaps). And hell need to figure out
ways to encourage his high-profit customers to recommend his business
to others and, assuming it continues to grow, hell have to hire and keep
good employees. But he has a solid foundation to build on.
But it isnt only exotic businesses, such as animal trapping, I discuss
here. Often the best opportunities are to be found in high-demand service
businesses, such as home repair, plumbing and heating, tutoring kids, home
health services, financial planning, consulting, and other well-populated
fields. Precisely because these are areas of high customer demand, they
routinely attract large numbers of providers, many of whom will soldier
along for years without ever achieving real success. But a substantial
minority who understand how to build and market a better business will
achieve an impressive and lasting prosperity.
Although good old fortune can play a short-term role in separating
the highly successful entrepreneur from her more pedestrian peers, my
own Nolo experience convinces me I really can teach you how to make
your enterprise stand above the common herd.
I discuss all these keys to success in this little book. I hope you enjoy
it, and that it inspires you to look at your own business with a new eye.
1
Build a Meaningful Business
n June 16, 1997, I walked out of my office on Nolos second

floor editorial area to see a group of editors gathered around
Steve Elias, Nolos associate publisher. Steve was holding a
single sheet of paper. My curiosity piqued, I joined the others and was
just in time to hear him read:
The Unauthorized Practice of Law Committee [of the State of Texas]
has received information that you may have engaged in activities which
constitute the unauthorized practice of law you are requested to
provide the undersigned investigation with a written response to the foregoing description of your activities within ten days.
Although the rest of the letter was full of similar muddy legalese, one
thing was clear the legal establishment of the State of Texas had begun
legal proceedings against Nolo, which if successful could lead to our books
and software being banned from sale in Americas second most populous
statean action that would almost surely lead to lawyers of other states
also attempting to suppress our publications.
How a Tiny Business Took on the Texas

Legal Establishment
Given the freedom of press protection of the U.S. Constitutions First
Amendment, how could Texas even contemplate banning self-help legal
books and software? Unfortunately, the organization behind the Supreme
Courts letter, the Texas Unauthorized Practice of Law Committee (UPLC),
had a ready answer. Their legal strategy was to categorize Nolo andwe
later learnedseveral other self-help law publishers, as unlicensed
charlatans bent on providing Texas consumers with bogus legal information.
Thus categorized, our books and software fell under the provisions of
Section 81.102, of the Texas Government Code, a Depression-era law that
prohibited the practice of law by unlicensed individuals. Since even the
U.S. Supreme Court had found that a states ability to protect its citizens
by adopting professional licensing laws could trump free speech claims,
Nolo was clearly in for the fight of its life.
My first thought was to pull all of our employees together and as
calmly as possible explain the serious threat we suddenly facedbefore
rumors of impending legal disaster in Texas could race through Nolos
headquarters. But before I could step towards the intercom, Steve said I
see this as a great opportunity to spread the word about how Americans
really do have the right to access their laws without lawyer intervention.
Nolo has been given a golden opportunity to play offense.
As I looked at the Nolo editors gathered around Steve, and saw they
were smiling and nodding, I relaxed. Nolo staffers, fully grounded in our
Law for All mission, were not panicked by the Texas attack. Although
there would be a need to promptly explain the dangers we faced to all
Noloids, clearly a crisis meeting wasnt required.
Fortunately, when all of Nolos 80 employees understood what the
Texas legal establishment was trying to do, most were similarly optimistic.
BUILD A MEANINGFUL BUSINESS
And it wasnt simply an effort to put their heads in the sand. Like virtually
everyone who has been long associated with Americas legal system,
Noloids knew that being right isnt necessarily enough. A well-heeled
opponent like the State of Texas can wear down any small business with
a long legal battle and millions of dollars in legal bills with the result that
even a favorable judgment may only be a Pyrrhic victory.
But Noloids also knew from prior run-ins with lawyer trade groups
that fighting back was the best way to spread the word about our little
company and its core mission to make Americas legal system more
accessible, affordable, and democratic. Indeed, way back in 1971 then
tiny Nolo achieved its first marketing success after the president of a prestigious California bar group warned that using Charles Ed Shermans Do
Your Own Divorce in California was akin to ingesting poisoned Tylenol.
Our initial conclusion that the Texas legal establishment was serious
about banning our publications was confirmed in the spring of 1998 when
we were instructed to appear at a closed-door hearing before the Texas
UPLC in Dallas. This was to be our official chance to respond to charges
that selling our books and software amounted to the unauthorized practice
of law.
But before I tell you how our battle with the Texas legal establishment
played out, let me go back a few years to briefly explain how Nolos
deeply embedded culture of standing up for the legal consumer developed.
In 1971, Charles Ed Sherman and I founded Nolo after spending several
years as legal aid lawyers in the Bay Area. Working for a federally funded,
community-based legal assistance program in the late 1960s, we were
tasked with providing legal help to thousands of low-income people,
most of whom had never previously met a lawyer. As you might guess,
helping the legally disenfranchised was an exhilarating experience for a
couple of middle class guys still in their mid-twenties. But unfortunately
our years as legal aid lawyers were marred by one huge unhappy reality;
every day we turned away scores of people with serious legal problems
because their modest, working-class incomes rendered them ineligible for
free legal help.
To truncate a much longer story, after several years of referring
thousands of these working poor citizens to local lawyers we knew they
couldnt possibly afford, we sensed an entrepreneurial opportunity. Starting
with Eds breakthrough How to Do Your Own Divorce in California, we
founded Nolo to provide self-help legal alternatives to the millions of
average Americans priced out of our legal system by the professions high
fees.
Over the almost 27 years from Nolos founding to our brush with
Texas, Nolo deliberately hired and trained people who shared this populist
vision. Toni Ihara, Steve Elias, Mary Randolph, Linda Hanger, and many,
many more Noloids joined our company drawn by our core commitment
to building a profit-making enterprise that was at the same time committed to making our legal system more accessible and democratic.
Among the many ways we built this idea of legal reform into our
corporate business, a few stand out. Most important, symbolically, we
added the phrase Law for All to the word Nolo as our official business
identifier. Of more substantive significance, we encouraged our legal editors
to testify at public and legislative hearings advocating a more democratic
legal system, and for many years devoted roughly a third of our free
newspaper, The Nolo News, to legal reform issues such as rewriting laws
with plain English, tasking the courts with providing simple forms and
instructions to the self-represented, and making courtrooms welcoming
rather than intimidating for nonlawyers.
When our print publication was replaced by Nolo.com as the main
way to communicate with our fast-growing constituency we included a
prominent Democracy Corner section to continue our evangelism in
favor of leveling the legal playing field for the self-represented. Finally,
10
and probably most important to convincing our employees and knowledgeable customers that Nolo practiced what it preached, we used some
of the profits generated by our bestselling titles to subsidize the niche
publication self-help law books. Referring to these in house as soul of
Nolo books, we did this much in the spirit of a pharmaceutical lab that
spends time and money to find the cure to an obscure disease. Even
though we knew any potential profit would be somewhere between tiny
and nonexistent we also knew that the information was both badly
needed and available nowhere else. To take just two examples, way back
in the mid-1980s we published a title for grandparents who suddenly
found themselves parenting their grandkids and were in need of a lowcost legal guardianship. And even earlier, we published another to help
financially pressed stepparents who wanted to adopt their new spouses
children.
In short, when the Texas legal establishment challenged Nolos
continued ability to sell our publications in that state, we were psychologically and culturally ready to embrace the struggle. No question we were
also sobered by the prospect of the high costs of fighting an organization
with huge financial resources. And we were ever mindful that if we took
a wrong legal step and lost our fight, the growing but still immature
national self-help law movement would likely be set back by at least a
decade. But despite all this we also couldnt help feeling excited. And
why notwithout intending to, the Texas UPLC had handed Nolo a huge
media canvas on which we hoped to paint a persuasive picture of how
Americas legal profession regularly conspired to place their own profit
and privileges ahead of the right of all Americans to affordable legal access.
Enough history. Lets get back to the fight. As you might expect
Nolos immediate response to the UPLC summons was not to roll over
and beg for mercy (as several other self-help law publishers did). Instead
Nolo challenged the committee! Among other things, we promptly asked:
11
Had any Texas citizens had been harmed by Nolos products?

Which of our hundreds of publications were being investigated?
(We even sent the committee a catalogue and a pencil to ease
their task of identifying the worst culprits.)
What were the names of the people on the UPL committee
(theretofore kept secret)?
What procedures would be followedfor example, could Nolo
question witnesses?
When the UPL refused to address any of our requests, we immediately
went public with the details of the proceedings, something that was all
but unprecedented in the hush-hush world of unauthorized practice of
law investigations.
Then, with the invaluable help of Austin civil liberties litigator Peter
Kennedy, Nolo filed a lawsuit in the Supreme Court of Texas, challenging
the secretive, inquisition-like investigatory procedures being followed by
the UPLC and asking that the Supreme Court of Texas order the UPLC to
disclose the requested information. The subsequent oral argument before
the Texas high court was covered by dozens of news organizations.
Although the ensuing legal battle took two years and featured many
more legal and technical twists and turns than are of interest here, four
key factorsall stemming from Nolos commitment to building a meaningful business based on the idea of law for allwere crucial to our eventual
victory. (See www.nolo.com/texas/index.cfm for the full story.)
Unity of Purpose
First, as already mentioned, virtually everyone at Nolo was unified by our
businesss long-standing commitment to create a more democratic legal
system. Also, our convictions had already been repeatedly tested over the
12
years when state bar association officials attacked and criticized both the
broad concept of self-representation and Nolos growing arsenal of books
and software (often claiming that a person who represents herself has a
fool for a client). We had considerable experience in fighting back. For
example, when several prominent attorneys, including the late Melvin
Belli, claimed that filling out a simple check-the-boxes, fill-in-the-blanks
legal form was akin to doing your own brain surgery, we responded by
asking, Does it really take three years of law school to confuse a hair cut
with a major operation?
Nolo also gained conviction by observing how trailblazers in other
new fields acquired strength from the unfair attacks of established economic
interests. For example, we studied how pioneers in the organic food
business had turned the strident derision of the chemical and pesticide
industries into a marketing bonanza. Similarly, it was easy to see that one
of the biggest assets of auto safety experts, affordable funeral advocates,
and low-carb food pioneers was the over-the-top attacks of the vested
interests threatened by their new ideas.
Credibility
A second, huge Nolo asset was that many people in the media already
knew and trusted us. When we sent out press releases explaining how the
Texas legal establishment was trying to use an obscure law to ban our
books, many reporters paid attention because we had long been a leader
of the affordable legal access movement. Instead of having to convince
them from scratch that our publications offered people of average means
a reasonable alternative to $250-an-hour lawyers, we were able to quickly
get them to focus on the details of how the Texas UPLC was primarily
interested in protecting lawyers economic turf. As a result, over 1,000
Texas and national media outlets covered our battle, including The Wall
13
Street Journal, CNN, ABC News, The Chicago Tribune, and The L.A. Times.
A major New York Times piece was even reprinted in the International
Herald Tribune, which meant the story of how Texas lawyers threatened
to gun down our small company went worldwide. And every time the
Texas vs. Nolo story seemed to be getting stale, a member of the Texas
UPLC could be counted on to revive it by saying something inflammatory.
For example, panel chairman Mark Ticer told Time magazine that Ninetynine percent of the people we deal with [individuals and companies like
Nolo charged with unauthorized practice of law] should be in jail. As
Steve Elias said to me, With an enemy like this, you almost dont need
friends!
Public Support
The third important element of Nolos success was provided by many
direct supporters. When we filed our lawsuit against the UPLC, Nolo was
joined by both the Texas Library Association (representing the great
majority of Texas librarians), and the prestigious American Association of
Law Librarians. To say the least, the principled support of Nolo by these
two highly respected librarians groups added greatly to Nolos assertion
that our dispute really did raise fundamental issues of free speech, free
press, and access to justice.
Loads of individual Americans, many of them influential, also supported Nolo. Their help took two broad forms. The first involved many
hundreds and possibly thousands of people who, after hearing or reading
about our story, contacted either the Texas UPLC, the Supreme Court of
Texas, or the Texas Legislature on our behalf. Letters, faxes, and emails
poured in to these organizations from consumers and businesspeople
who had used our books as well as academics, librarians, and even some
lawyers and judges who supported our right to publish them. In one
14
example, Thomas D. Russell, Professor of Law and History at University of

Texas Law School wrote, The current attempt to shut down Nolo Press
within Texas is a reprehensible and pitiable attempt by weak-minded
lawyers who fear that they lose power and wealth when independentminded Texans buy Nolo Press books and peer beneath the priestly robes
of Texas lawyers. (See www.nolo.com/texas/Professor.html for the full
text of Professor Russells letter.)
Customer Support
The fourth key element in our struggle was a group of individual Texans,
each of whom had successfully used our books or software (and in the
process saved many thousands of dollars in legal fees). We needed
individuals to join our lawsuit filed in Austin, Texas, so we sent invitations
to 32 customers in that area. Remarkably, 28 said yes. Because such a
large group of plaintiffs was simply too hard to manage on our limited
budget, we eventually chose six. We included people who had used our
materials to start businesses, make wills, and file for divorce. In sworn legal
declarations, all these people responded to the UPLCs core charge that
Nolos publications somehow practiced law, by stating that they had no
trouble telling the difference between a Texas lawyer and a Nolo book.
The evening before we filed our court papers, all of the plaintiffs
gathered at our Austin law firm where Peter Kennedy reviewed the
significant legal issues at stake. The atmosphere was earnest and electric. I
stood and looked into the faces of the librarians and public-spirited Texans
who had volunteered to join our lawsuit with no expectation of personal
gain. Their sincere, unselfish gesture to protect access to the law struck
me as an intensely patriotic stance and I was reminded of the many
thousands of similar protest gatherings which had been held throughout
American history from the town meetings that preceded the American
15
Revolution, and the pre-Civil War periods abolitionist movement through

struggles of the 1950s for civil rights. Shaking my head to clear it of the
ghosts of patriots past, I thanked everyone for his or her principled support
and asked each to say a few words about why they had volunteered without any compensation to join a highly controversial lawsuit against the
Texas legal establishment. Almost to a person, the answer was that each
believed that our little companyand even more important the self-help
law message we enunciatedwas a force for the good in the world. And
if the lawyers of Texas thought they could drive us out of the state without a fight, they better think again.
The Finale
And now for the end of our drama. Instead of an Alamo-like showdown,
it ended in a series of legal whimpers. In the summer of 1999, in the face
of our lawsuit (and the legal maneuverings of several other self-help law
publishers), the Texas legislature adopted House Bill 1507 which altered
the states UPL statute to state that the practice of law does not include
written materials, books, printed forms, Internet sites or similar media, as
long as the items clearly indicate that they are not prepared by a person
licensed to practice law in this state. Of course this had been our position
from the start and our books and software had long carried a similar
disclaimer.
But quibbles aside, the new law was great news. Not only was our
two-year fight finally over, but it had ended on our terms. And although it
had cost Nolo a small fortune, our books and software salesdriven in
large part by all the favorable publicity we receivedactually increased
enough over the next few years to make us financially whole. And, in a
bit of poetic justice, Texans, it turned out, became some of our best
customers, purchasing more Nolo books and software than the citizens of
any state, except our home state of California.
16
How to Make Your Business Meaningful

Enough about Nolo? Lets turn now to how you can make your business
stronger by imbuing it with a positive purpose. For some businesses
solar engineering, recycled lumber, or ethical investingaltruism is built
into the companys purpose. The challenge for these businesses is typically
to deepen and broaden the sense of commitment by making sure
employees, contractors, and even suppliers fully understand and buy into
it.
If, as is more likely, your business doesnt come with a built-in sense
of missionfor example youre a lawyer, you run a restaurant, or you do
landscapingit will be your job to create one. Fortunately, with a little
creativity it isnt hard to align even the most prosaic of enterprises with a
positive goal. Here are a few examples:
A coffee shop serves fair trade coffees while educating its
customers that by so doing, it both serves a better cup of java
and helps provide a living wage to desperately poor Central
American coffee farmers.
A publisher of a financial newsletter provides a website to educate
non-English speakers about sound personal money management
practices.
An eyeglass shop develops a program with local homeless shelters
to provide desperately needed glasses to the poorest among us.
A computer service and repair outfit develops a low-cost recycling
program for old computers.
This list could easily run off the bottom of the page. For those who
want to learn more about how to transform an everyday business into a
meaningful one, I recommend True to Our Roots, Fermenting a Business
Revolution, Paul Dolan (Bloomberg Press). Dolan, President of Fetzer
17
Vineyards of Mendocino, California discusses how in the early 1990s

Fetzer committed itself to beginning a highly controversial program of
making wine from organically grown grapes.
Fast forward fifteen years and Fetzers sustainable viticulture approach
is now widely recognized, respected, and emulated. It turns out that
growing grapes without heavy doses of chemical fertilizers is not only
better for the land, better for the water, and better for the vineyard workers; its also better for the taste of the wine. As has proved true in so
many other businesses, Fetzers commitment to serve the greater good
also turned out to be very beneficial for its bottom line. Its cheaper to
grow grapes organically, employees are healthier and happier, and new
customers are attracted both to sustainable viticulture and better tasting
wine.
If you are still wondering how you might best develop a sense of
purpose for your enterprise and whether doing so would be worth the
trouble, take a long walk and think about four concepts:
sustainability
education
service, and
excellence.
I suggest these four because experience has shown that countless
businesses have successfully embraced one or more to deepen their sense
of purpose. Lets take a moment to consider each.
Sustainability
In the words of Ernest Callenbach, author of Ecology: A Pocket Guide
(University of California Press, 1998), from a human point of view, a
sustainable society is one that satisfies its needs without diminishing the
18
prospects of future generations. In our petroleum-centric, throwaway

economy, any business that advances the idea of resource sustainability
whether via solar or wind power, organic agriculture, green construction
techniques, resource recycling, or in dozens of other waysis almost
automatically a force for the good. This is especially true if, like Fetzer
Vineyards, your business is able to successfully change from an old-style
resources-be-damned paradigm to one that treats physical resources and
human beings as nonexpendable.
Of course, in our highly wasteful world, winemaking is just one of
thousands of business endeavors that can be transformed by the concept
of sustainability. For example, the owner of a small local gardening service
who shows customers how to grow beautiful plants with half the water and
no chemical fertilizer makes a significant commitment to the betterment of
all of our lives. And so does a printer who features recycled papers and
nonchemical inks. Even an accountant who helps customers substantially
reduce the amount of paper needed to prepare their tax returns makes a
meaningful contribution.
Superior Service
A second way to imbue your business with a sense of purpose is to
dedicate it to providing truly superior customer service. Since many small
businesses at best provide spotty help to consumers, designing your
operation so that it is accessible, responsive, cheerful, and competent will
almost immediately set it apart. And for good reason, since by putting
your patrons needs first, you have created a remarkable thinga business
that is at the same time helpful and unselfish. Just as all of the worlds
religions and many of its other not-for-profit enterprises honestly attract
people by emphasizing these virtues, so, too, can your small business.
19
Example 1:
When prospective customers call Phil, a home repair contractor,
the phone is picked up by an answering machine. Phil tries to
return calls each evening but doesnt always succeedespecially
when he has had a long, frustrating day. When Phil finally does
talk to callers its often to tell them hes too busy to fit their job in.
The result of Phils poor call return policy is that he ends up not
working for three out of every four people who call. Thats really
too bad since Phil frequently experiences periods when no one
calls and he doesnt work.
Example 2:
Now suppose that Phil realizes his business model is broken and
decides to fix it by making customer service his first priority. To
this end, Phil contacts five quality competitors and invites them to
join in setting up a customer referral and support network. When
a potential customer calls Phil or one of the other contractors
during a busy time, shell be referred to another member of the
group who can more promptly fit the job in. And oh yes, because
five contractors now work together they can now afford a parttime scheduler who will return every call within two hours.
Its easy to see how this approach allows Phil and the other home
repair contractors to provide better service. And, of course, it follows that
the satisfied customers are likely to recommend the contractors group to
others, thereby creating new business. (See Chapter 8, Market Your
Business Creatively, to better understand the principle of word-of-mouth
marketing.)
20
Pleasing customers is one way of providing superior service. A

second is to provide assistance to your community. By giving something
back to your municipality (or to an electronic community, if yours is a
Web-based business), your enterprise establishes an honest connection to
real people that chain stores and out-of-town franchises can never
achieve.
For example, Phil and his group of contractors can further elevate
their service beyond promptly returning calls and responding to emergencies
by committing to work with a local jobs center to help train a low-income
minority apprenticea young person who would otherwise find it hard to
to learn contracting skills. By jointly mentoring an aspiring contractor in
an on-the-job program, the six entrepreneurs could make a real difference
in a young persons life. And assuming that they found appropriate ways
to tell their customers about their program, chances are many would
cheer them on.
Education
But as important as the concepts of sustainability and service are to building a meaningful business, a strong commitment to education normally
offers the best way for most small businesses to instill a sense of honest
purpose in their operations. Without being too corny about it, we tend to
regard those who teach to be worthy of our respectand that goes for
everything from teaching golf and cooking to woodworking and novel
writing. Providing instruction taps into the almost universal human respect
for knowledge and the ability to do things better.
Add to this respect for learning the fact that most Americans are
inveterate self-helpers, anxious for information that will allow them to
improve their own lives. Its easy to see why consumers are drawn to
businesses that teach them useful skills. And lest you doubt this, think for
21
a moment about the literally thousands of popular magazines, self-help

books, and even TV and radio shows that prosper by instructing people
how to better accomplish an almost infinite list of tasks, from fixing their
cars or learning French, to making over their own bodies, finding a mate,
or raising an obedient spaniel.
In short, virtually every business, including yours, has a chance to
deepen its sense of mission and purpose by educating customers.
Example:
Walters Barbershop is a relatively new addition to the Main Street
scene in a small mid-western city. Like all barbershops, Walters
cuts hair. But in an effort to set his business apart from at least its
less fastidious competitors, Walter commits himself to maintaining
a super-clean, uncluttered environment. In addition, he adopts a
flexible staffing pattern backed by an easy-to-access reservation
system so as to both reduce waiting time and accommodate as
many customers as possible during busy periods.
So far so good, but several other barbershops in town have
also thrown off their sleepy old ways. In short, although Walters
commitment to cleanliness and service is a definite marketing plus,
it doesnt convincingly distinguish his business. To do that Walter
decides to educate men about healthy hair care and effective
remedies to reverse baldness. He does this by creating a little
niche in his waiting area, complete with attractive information
sheets explaining the pros and cons of different types of shampoos,
conditioners, and dandruff treatments along with copies of reliable
consumer testing reports and other comparative hair product data.
In addition, Walter provides up-to-date information about the
advantages and disadvantages of all legitimate anti-baldness treat-
22
ments and techniques along with material debunking the many

hair growth scams. Finally, Walter provides a comprehensive list
of reputable local doctors who treat hair loss, hair weave specialists,
wigmakers, and other area businesses that help cancer patients
and others cope with sudden baldness.
As mentioned, virtually every type of business can improve its
relationship with their customers by providing access to life-enhancing
information. But to really succeed by adopting an education-first approach,
youll need to capture the imaginations of all your businesss key stakeholders, including its employees, contractors, suppliers, employees, and
even any investors. With everyone on board, a good customer education
program can create a sense of deep-seated pride that can greatly improve
every aspect of your operation.
Example:
Joes Hardware occupied the corner of Main and Maple in downtown Riverview ever since Joe I opened it in 1946 after returning
from service as a sergeant in Pattons 3rd Army during World War
II. But in 2004, with more competition soon to come from a big
box store planned for a commercial area ten miles away, Joe III
clearly saw that the old stores relatively small physical size plus
its lack of free parking doomed it to a marginal future. So Joe III
decided to make a big move to a strip mall a half mile away,
taking over the space vacated by a large chain drugstore. Not only
was the new buildings footprint double the size of the old ones,
but it was surrounded by half an acre of free parking and came
with an efficient loading dock, something the old store lacked.
Nevertheless, Joe III worried that by abandoning his familys
charming and much-loved downtown shop in favor of a more
23
efficient, but far less sexy retail environment he risked losing

many longtime customers.
To keep the loyalty of Joes long-term customer base and
hopefully to win back former customers who had gone elsewhere
after becoming frustrated by the old stores lack of selection, Joe
III decided to fundamentally change the way his business operated,
by designing the new store around a strong educational component.
This took two main forms. First, Joes Hardware leased a small
empty space next door to its new location and turned it into a
classroom where it could hold free classes for do-it-yourselfers.
Focused on practical subjects like pouring concrete, building
decks, and replacing worn-out plumbing fixtures, Joes self-help
sessions would be taught by local contractors, manufacturers reps,
decorators, architects, and a couple of authors of self-help building
guides, all of whom would accept modest fees in exchange for
the highly desirable opportunity to market their own services,
products, and publications.
Joes Hardwares second teaching initiative was to hire a
group of retired home repair and building contractors as senior
clerks, each willing to work 10 to 15 hours per week for a reasonable wage. Eventually, Joes stable of in-store experts included
plumbers, electricians, carpenters, tile layers, and general contractors,
each available to answer do-it-yourself questions and help patrons
select merchandise. And to make it easy for customers to easily
connect with the right expert, Joes published a monthly schedule
of their work times on its Internet site and in flyers.
Joe suspected that the occasional customer came to him for
free advice and then tried to save a few dollars by buying from
the big box store, but he quickly saw that this wasnt a significant
economic threat. Thats because in the first year after the move,
24
both Joes Hardwares gross revenue and net profit almost doubled
as newly empowered customers purchased more and told their
friends that almost any do-it-yourself home improvement job
would go better with the help of the knowledgeable folks down
at Joes.
Dont take money from investors who

dont understand your mission.
Sadly, the many good reasons why a business benefits by
investing in concepts like sustainability, education, and service
are lost on many investors whose goal is to pump up shortterm profit, often by selling the business. So before you take
money from anyone, be sure they also buy into the idea that
building a meaningful business is the best way to build value
in the long run.
Excellence
Depending on the type of business you operate, excellence can be
defined in many ways: highly accurate, relentlessly innovative, most
accessible, or cleanest, for example. Arguably, a commitment to excellence
should be a part of every enterprise, and that it isnt, by itself, a discrete
way to do business. But I dont buy it. In my experience, because many,
if not most, small businesses are run in a mediocre fashion, a true dedication to providing customers with the highest quality goods and services is
a significant way to imbue it with purpose.
25
Or to put it more bluntly, the excellent business is almost always

regarded by its customers as transcending its market niche. In my field of
self-help law publishing for example, Nolo stands out not only because of
our commitment to affordable legal access, but because our materials are
clearly so much better and more helpful than those of our competitors. So
much better, that over and over our customers tell us that they simply
cant believe we can publish professional quality materials in a low-cost
paperback format. And, of course, this isnt an accidentNolo consistently
and consciously invests more time, energy, money, and commitment in its
products than do others in the field.
You may ask whether is it really cost effective to spend the extra
time, money, and effort to run a truly excellent enterprise when many if
not most customers will be satisfied with pretty good? Or put another
way, will your employees, customers, and the rest of the people in your
network really value your business more highly because you consciously
work to achieve the highest possible standard? The answer is a resounding
yesespecially in fields where there are lots of competitors.
Your commitment to excellence will also furnish everyone connected
with your business with a sense of pride. Or put another way, in the
world of small business where dirty windows, cluttered sales areas, and disinterested service is so often the norm, your commitment to consistently
do better will quite properly be seen as something special. And it wont
only be your customers who will respond positively. Employees, independent contractors, and others in your network will not only be proud of
being associated with your excellent operation, but willing to contribute
their enthusiastic support.
To see how a commitment to excellence can even transform a large
industry, consider how relatively quickly and definitively Honda and
Toyota achieved worldwide respect during the last quarter of the 20th
century, based on their determination to make the most reliable, repair-
26
free cars. The fact that in our new century these two excellently run
companies have also embraced the concept of sustainability by introducing
higher-mileage, less-polluting electric-gas hybrid vehicles has only deepened the esteem in which their many loyal customers hold them. And of
course Hondas and Toyotas commitment to excellence means that people
who work for these companies are not only proud of what they do but
understand that its up to them to be sure that the highest standards
continue to be met.
Similarly, at Nolo, everyone in the building is proud of the fact that
our people-oriented, plain-English legal materials are the most accurate
and up to date, bar none. Thus when a customer writes or emails us a
success story, whoever receives it typically forwards it to everyone. But
instead of telling you more about how Nolo communicates its quality
advantage to its customers and longtime media fans, lets focus on how a
more typical small business might apply the concept of excellence to
improve a key aspect of its operations.
Example:
Cindy and her brother Abraham inherited the Ace Garage when
their dad, Woody, died. Ace had been repairing cars in Lake Port
for over fifty years. But like so many car repair shops, it looked its
age. In the last decade of his life, Woody simply hadnt had the
energy or inclination to make significant improvements.
Cindy and Abraham immediately agreed that big changes
were needed if the garage was to provide a comfortable income
over the next several decades. They focused first on cleaning up
what they had to admit was a typically filthy garage. With the help
of a team of professional cleaners and painters, Cindy, Abraham,
and their employees cleaned and painted almost everything, from
the service bays and office to the driveway and the roof. Even the
27
gumball machine got a coat of new red paint. And it wasnt just
the building that was scrubbed and shinedenough new overalls
were ordered so that every Ace employee would have a clean pair
each morning. Not surprisingly, when the refurbished, new Ace
reopened in mid-January, Cindy and Abraham received lots of
praise, including even a picture of the garage and its striking new
sign in the local paper. Best of all, business immediately increased
almost 15%, with the result that they could project that the cleanup cost would be amortized in less than a year.
But Cindy and Abraham werent done. They next set out to
create a keep-it-clean culture at Ace. Instead of yelling at longtime
employees when they reverted to their sloppy old ways, Cindy
and Abraham demonstrated their personal commitment to cleanliness by adopting a Sunday clean-up strategy. If a mechanic fouled
the floor or walls of his area during the week, or the oil an old
clunker leaked on the driveway was still there Saturday evening,
Cindy or Abraham would personally come in on Sunday to scrub
and, if necessary repaint the offending area. As you might guess, it
only took a couple of weeks of this gentle shaming before the
garage was kept so clean Cindy and Abraham were free to find
better ways to spend their day off.
Cindy and Abrahams next effort to distinguish their business
was to install a small carwash unit in the back parking lot. Now,
every car repaired by Ace was given a complimentary washand
for a small optional fee an inside cleaning. Not surprisingly,
customers who brought in cars both broken and dirty were
delighted to pick them up both repaired and scrubbedso pleased,
in fact, that they frequently told their friends and relatives about
Aces superior service.
28
But running a clean repair garage wasnt Cindy and Abrahams

only effort to improve Ace. Realizing that a few incompetently
done repairs can alienate customers and drive up customer service
costs, Ace began a campaign to improve its repair work. Mechanics
were asked to refresh their skills through classes and seminars
paid for by Ace that were designed to help them take maximum
advantage of the new diagnostic machines Cindy and Abraham
purchased with the help of a small bank loan. When one employee
balked at learning all the damn fool new technology Cindy
helped him find a job at a more traditional garage down the street.
Although nothing was said about the reasons for the change,
other Ace employees redoubled their efforts to maximize their
skills.
To celebrate the end of their successful first year, Cindy and
Abraham had a low-key staff holiday party at which they handed
out red baseball caps with the number 55 (the age of the garage)
on the front and the small words ACE-Accuracy, Cleanliness &
Excellence embroidered just above the back adjustment strap.
When many of their employees regularly wore their caps to work,
the energetic duo knew they really had converted Ace into a
garage with a mission.
29
2
Choose a Business You
Care About
To love what you do and feel that it mattershow

could anything be more fun?
Katharine Graham
specially if you havent yet greeted your first customer, it may

seem premature to focus on the importance of staying committed
to your business over the long term. Best to think again. Most
small businesses take three to five years to become solidly profitable, and
at least several more to justify all the work and investment that went into
their creation. But once profitable, a business can continue to make the
cash register sing for many years, if not decades. In short, to enjoy the
financial success youre hoping for, you need to be ready to run a marathon,
not a sprint. And that means youll want to pick a business you fundamentally care about, not just one you think will make big profits.
Picking the right business is a lot like picking the right spouse. Till
death do us part is a long timeimpossibly long if you and your spouse
arent a good fit. Running a small enterprise is much the same; youll have
many days when nothing goes right, and youll inevitably wonder whether
life doesnt have something better to offer. As with marriage, youll hang
in there only if the glue that brought you together in the first place has
lots of stick.
A few people are lucky enough to create a business that springs
directly from their hearts. They are what they do in the best sense of that
phrase. But most of us arent quite so fortunatethe best we can do is to
start a business in a field we are interested in, but not in love with. We
are content to fill teeth, sell golf clubs, or counsel dieters from 9 to 5 so
we can raise a great family, spend time with our friends, and maybe even
sing opera, scale mountains, or write poetry in our free time.
No problem, as long as you really do care about your businesss core
functions and find ways to invest them with meaning. That way, when the
going gets tough, or even when youve been successful for several years
and begin to feel boredoms first inevitable tugs, youll be well-positioned
to persevere. To carry on happily and profitably over many years, you
will also need to periodically change and refresh many aspects of your
business, something that will be much easier to accomplish if you respect
and care about what you do.
Plan for the Long Haul

Given that, by most estimates, only about 20% of small businesses last
even five years, its easy to see that staying power, and not just a good
32
CHOOSE A BUSINESS YOU CARE ABOUT
idea or hard work, is key to success. Of course, small businesses fail for
dozens of reasons. Financial mismanagement, poor customer relations,
bad personnel decisions, fights between co-owners, and selling undistinguished products and services top the list. Especially in combination,
these failings are quick business killers. But oddly, one of the commonest
reasons small businesses closeespecially after experiencing an initial
burst of successis often overlooked. Entrepreneurial boredom is the
best description of this stealthy killer of seemingly healthy small businesses. Typically, it strikes just when a business begins to successfully
emerge from its start-up phase, but is still fragile.
To prosper, most small businesses depend on the energy and entrepreneurial savvy of their owners, and if either begins to flag, it creates an
immediate problem. A bored or depressed owner is likely to stop doing
the many little things that made the business initially seem so special to its
customers. A restaurant owner is no longer willing to stay late to greet the
last customer; the proprietor of an imported fabric store refuses to travel
frequently in search of new designs; or the owner of a haircutting boutique
neglects freshening the window display. As these businesses begin to
become as boring as their owners are bored, customers quickly sense the
loss of entrepreneurial energy and look for more robust alternatives.
Typically, a business begins to lose momentum when the owner stops
focusing on how to continuously improve every aspect of its operation,
and instead adopts an if its not broken, dont fix it attitude. This lackadaisical approach may work fine for several months or, if the business has
a large following or a particularly well-defined competitive niche, maybe
even a few years. But businesses that stand pat for an extended period
or until others copy or improve on their products or servicesinevitably
lose customers. And once a downward spiral begins, it is often too late to
reenergize an operation enough to reclaim its position in the marketplace.
Whether you give massages, provide home health care, install fences, or
33
any one of thousands of other tasks, the smart and aggressive competitors
who have passed you by are likely to be working hard to extend their
new lead.
Although entrepreneurial boredom can damage businesses of any
sizeit took decades of producing mostly undistinguished cars to
severely blemish once mighty General Motorsthere are two reasons it is
particularly lethal to small ones. First, little businesses rarely have the
financial reserves to weather an extended downturn. Second, when old
customers begin to disappear, few small enterprises can afford to spend
enough on advertising or other marketing efforts to quickly attract new
ones. They must rely instead on the slow process of gaining new business
based on the positive word of mouth of satisfied customers, who are by
definition beginning to be in short supply (or in a worst case, are no
longer satisfied and are beginning to actively criticize the business). Or
put another way, even if a somnolent business finally wakes up and
introduces fresh and exciting products or services, it may run out of
money before it can convince enough customers to give it another chance.
Which, of course, goes far towards explaining why, when a downtrodden
business is sold, the new owners first steps are usually to put up an
Under New Management sign and to attempt to change as many of the
physical attributes of the business as possible. Thus a new owner will
often try to signal a business reawakening by painting the building, holding a sale, and implementing a number of new marketing initiatives.
34
The Exception: Serial Entrepreneurs

Every generalization has its exceptions. So it is with the proposition that
small business success depends on the caring involvement, if not passionate commitment, of its owner. Very infrequently, exceptional men and
women start a series of successful businesses during long and profitable
careers without seeming to give a hoot about their substance. Instead of
following the normal formula of carefully building and nurturing a business
over many years, they seem born with the knack of starting up and getting
out of enterprises at just the right time. For instance, one man I know
sequentially, and very successfully, started a small chain of mens clothing
stores, a grapefruit orchard, a golf resort, a commercial real estate
business, and a bank.
Most of the people who start or buy a number of disparate businesses in their lives share several traits. They love the dollars-and-cents
side of entrepreneurship. The business of business fascinates them. They
are also good at spotting potentially profitable niches before they become
trendy. Probably most important, they are willing (even eager) to sell well
before a business peaks in value.
Interestingly, most of the successful serial entrepreneurs I know love
to play cards for money and are very good at it. But none of them gambles
carelessly. Instead, they almost always know the mathematical odds for and
against every bet, memorize cards as they are played, and pay lots of attention
to the strengths and weaknesses of their fellow players. In short, they are
attracted to the idea of taking chances, but disciplined enough to do
everything possible to maximize their likelihood of success.
35
I have firsthand experience with just how important it is to choose a

business youre genuinely interested in. Close to 35 years ago, I quit practicing lawsomething I found almost terminally boringand helped start
Nolo Press, a publisher of self-help law books and software. In doing so, I
was fortunate to become involved in the following five endeavors I found
(and still find) fascinating:
mastering the expert systems that inform a number of consumer
law areas that were largely unfamiliar to me, including estate
planning, family law, and landlord/tenant law
teaching nonlawyers how to solve legal and practical problems
writing and editing
participating in the business of book and software publishing,
including, of course, starting and growing Nolo, and
writing and speaking about the reforms necessary to make
Americas legal system more accessible, affordable, and democratic.
Had my attraction to any of these activities been less strong, Im sure
Nolo would never have survived its early unprofitable years, when one of
its main assets was my unwillingness to quit. Even if it had lasted long
enough to achieve profitability, chances are excellent that like so many
other business founders, I would have gotten fed up with coping with the
stream of day-to-day problems that are part of any enterprise, and sold it
years ago. But because I still find it fun and rewarding to work on books
and software that demystify complicated-seeming legal information, Nolo
has had a chance to grow and mature into a large and profitable company.
Here are a few additional down-to-earth examples of why its important to pick a field you are authentically attracted to:
36
If you plan to go into the catering business, it will be far easier to

scrub the kitchen three years from now if you truly care about
food.
If you plan to study chiropractic medicine, your practice is likely
to do well only if you are fully committed to relieving your
patients pain. Just learning how the body works and how to
competently manipulate it is unlikely to be enough to keep your
interest over many years.
If you plan to open a garage to repair German cars not because
you like to get your hands dirty, but because the nearest BMW
dealer is 50 miles away, chances are youll make a hash of it. To
take just one example, what will you do if your chief mechanic is
sick? Far better to begin this type enterprise only if car repair is
something you have a real affinity for. That way youll be able to
step in and help fix the cars when you need to.
If you plan to open a dance studio to teach kids ballet, you
should care deeply both about children and ballet. If dance is
your passion, and teaching kids is just a way to pay your bills,
chances are the snot-nosed little devils will drive you nuts long
before you establish a solidly profitable business.
If you plan to open a business to help people manage their retirement savings, it will help greatly if you have real compassion
for older people, as well as skill picking investments. Otherwise,
you probably wont survive all the inevitable stories of chronic
illness, irresponsible children, and precocious grandchildren.
To emphasize how important picking the right business is, lets briefly
look at an example of how owner boredom, combined with more than a
dash of entrepreneurial hubris, combined to kill a successful clothing store
Ill call Snapdragon. When Snapdragon opened in a popular business
37
section of a good-sized university city, its exciting window displays of

cutting-edge womens fashions proved irresistible to loads of customers.
Passersby whose only thought was to grab a double latt at a neighboring
coffee shop found themselves instead getting a far more expensive lift by
buying a new outfit. Indeed, Snapdragon prospered so mightily that before it had been in business 18 months, a second location sprouted on the
other side of town. And when that store also seemed poised to bloom, a
third flowered in a shopping center ten miles to the north.
Imagine my surprise (shock would be a better word) when after
another 18 months I walked by Snapdragons original shop to find a
going-out-of-business sale in progress. Unbelievable was the word that
filled my head. I was so curious as to what had suddenly gone wrong, I
called Kathy, a friend who had worked briefly as a part-time bookkeeper
for Snapdragons owner, Millie. I expressed my disbelief and asked Kathy
to fill me in on Snapdragons history.
Millies success resulted from her great eye for style, Kathy told
me. She saw that there was a niche for clothes that were in between the
usual frumpy college-town look and the more upscale clothes you would
find at a Saks or Nordstroms. I heard several customers call this look
bohemian chic, but Id just say Millie understood how to display bright
colors, soft fabrics, and comfortable styles in an exciting way.
But it must have taken more than that to create such a successful
business, I said.
A huge part of it was Millies knack at designing a highly attractive
shop, Kathy said. In the first year, at least, she just seemed born to
create a jazzy retail atmosphere. We had truly innovative window displays
that she changed twice a month, hand-painted flowers on the dressing
room walls, and even fashion shows before major holidays. Not only were
the stores painted in inviting colors, Millie nailed every design detail so
38
perfectly that women all over town were buzzing about Snapdragon. But
it was clearly designing the shop, not selling clothes, that really turned
Millie on. I mean, she usually wore shorts and a t-shirt.
Whether Millie came to work in shorts or an evening dress, I still
dont get why such a popular store closed in less than four years, I
remarked.
Making a lot of money fast actually made Millie dumber, Kathy
replied. Instead of putting aside a reserve for the inevitable bad period,
she made a down payment on a nice house, bought a BMW, and went on
a couple of expensive buying trips that were really just thinly disguised
vacations. This ticked off a couple of good employees, who quit because
they didnt receive expected raises. But the problems really developed
when Millie began to lose interest in what really made the business work:
clothing that was attractive and exciting to her particular customers. For
example, she decided it was too hard to travel to trade shows every few
months to find exactly the right fashions, and started buying the styles
sales reps pushed on her. When lots of them turned out to be a little too
Rodeo Drive for her audience, she tried to get back to her old formula.
But by then, a couple other shops had opened nearby that combined
decent style with lower prices, and Snapdragon never regained enough of
its customers to return to its early level of profitability.
Do you mean Snapdragon wasnt losing money when it closed? I
asked.
Not really, Kathy answered. After making a bundle for a couple of
years and opening the other storeswhich, incidentally, were never as
profitable as the original and sapped Millies energy since she never
learned to delegate wellSnapdragon barely broke even in its third year.
That next fall, Millie worked extremely hard and worried a lot, but she
still made only a small profit. Thats when she decided shed had enough.
39
So Millie closed a profitable business that until recently had done

well?
Precisely. I think she never cared that much about selling clothes in
the first place. When she decided to pull out, she tried to sell the business,
but when the offers werent that great, she saw she could make a lot more
by having an extended going-out-of-business sale. She filled up all three
stores to the brim before she announced a closing date. And she was
rightthe fact that Snapdragon would soon be gone forever caused all of
her old customers to crawl out of the woodwork, with their checkbooks.
She moved a years inventory in three months and then she extended the
closing date 60 days and made even more.
What is Millie doing now?
Studying design, with the idea of opening a consulting business to
help small businesses improve their visual presentations. And you know, I
think if she sticks to it, shell do really well. Millie was always happiest
when she was in the front window area creating a wonderful display.
Turning her design flair into a career should be a great choice.
How to Stay Interested in Your Business

Even in a business you care about, there is the obvious danger that
boredom will eventually creep in. If you increasingly find reasons to be
elsewheretaking lots of vacations, attending trade shows, starting a side
business, or spending lots of time on nonprofit boards or a government
commissionits time to reexamine your commitment. Even if you still
put in a reasonable number of hours on the job, do you still have the
intensity and creativity that put the business on the map? If, instead of
coming up withand more importantly, implementingthe steady stream
of ideas needed to keep the business fresh, youre more worried about
40
why youre shanking your seven iron or buying the perfect sailboat, your
business is unlikely to continue to prosper.
The most insidious thing about entrepreneurial boredom is that
typically, it springs from the very thing that makes a business successful in
the first place: the intelligent repetition of many small tasks over many
months and years. No question, it can be tough to continue to make
excellent wine, soup, or soap day after day after day, or to teach ten great
aerobics classes 49 weeks a year. If you doubt how different it can be to
set a high standard and live up to it over the long term, think for a moment
about the laundry/dry cleaning businesses in your area. Chances are good
that only one or two excellent establishments have built up and kept a
large and loyal following over an extended period while other shops have
opened, done a seemingly decent business for a while, and then closed.
Its likely that the winning establishments built their apparently unassailable
market position because their owners stayed committed to providing
excellent customer service for years, if not decades, while at least some of
the businesses that folded did so because their owners just couldnt look
at another dirty collar.
As someone who has run a business for close to 35 years despite
being born with a low boredom threshold, I consider myself something of
an expert on strategies to stay interested and even invigorated by ones
business. Here are several that have worked for me.
Make Time to Do What You Enjoy Most

Hopefully, you were drawn to start your business because you were attracted
to some core part of it. If you work as an authors agent, you probably
enjoy books. If you make cabinets, chances are you like the process of
woodworking. Similarly, most successful golf teachers not only love the
game, but enjoy helping others master it. And many people who sell real
estate get a genuine thrill from matching someone to the perfect home.
41
But whether you simply like your field or have been lucky enough to
turn a beloved hobby into a successful enterprise, actually running your
business will inevitably involve many workaday aspects. Among literally
dozens of other tasks, typically youll need to crunch lots of paperwork,
pay bills, mediate food fights between employees or contractors, placate
customers, and probably coax the landlord to get broken equipment fixed
or restripe the parking lot. In my experience, its often while trying and
failing to squeeze a weeks worth of this type of work into a morning that
business-killing boredom begins to corrode your interest in your company.
Instead of happily spending your hours on your businesss fundamental workthe activity you found so attractive in the first placeyoull
often find yourself too busy to get to it. If youre a furniture maker,
instead of contentedly working in the shop with hammer and chisel, youre
all too likely to find yourself in the office spending frustrating hours
straightening out quality and collection problems with a big customer. If
youre a golf pro, instead of being out on the practice teeor better yet
the linksyoull only be human if you resent the many hours you spend
running the busy pro shop. And if you are an antiquarian bookseller who
lives for literature and fine examples of the bookmakers art, youll likely
hate long hours spent trying to decipher the intricacies of bookkeeping
software.
Sound familiar? If so, call a halt and do something about it. Several
times over the years, Ive had to just say hell, no to additional administrative work while facing the need to rid myself of piles of busywork. And
I didnt necessarily do this because I was overworked, but in order to
have time to do the writing, editing, and other legal self-help activities I
most enjoy. The good news is that if you follow my example, youll not
only stay in touch with what originally attracted you to your business, but
also have the opportunity to empower your employees, contractors, and
others you work with to competently handle many routine tasks. Because
42
almost by definition many small business owners come with Control Freak
stamped on their psyches, learning to delegate well can be as tough as it
is essential. (See Chapter 11, Dont Work Overlong Hours.) But even in
the unlikely event that you really are twice as smart and three times as
hardworking as the people who will replace you, its essential that you
make time for the work you care about. If you dont, the chances that you
wont stay interested in your business over the long term go way up. And
if this happens, the odds your business will produce the continuing stream
of healthy profits you hope for over the long term will drop just as fast.
Example:
Ed quit his job at one of the large Silicon Valley chip outfits and
started his own website design consultancy, operating from a
small office in a converted backyard garden shed. In the beginning,
Ed did it allfixing the balky printer, hunting for business, creating
the custom websites that were the businesss core product, and
collecting the money. But as his business quickly prospered, Ed
moved into an office building and recruited a couple of designer
pals to help create the sites while he concentrated on bringing in
more and more lucrative contracts. But the better Ed succeeded
financially, the more dissatisfied he became with the hassles of
running the business, at one point even considering closing and
going back to the Silicon Valley treadmill.
Thats when Beth, a business consultant and friend, suggested
a different approach. She recommended that instead of hiring
designers, Ed should hire an experienced marketer so that he
could spend at least 50% of his time on the design side of the
business. He took the advice, and the result was that even though
WayCoolWebPlaces earnings declined slightly the next year, Ed
43
had a smile on his facealways a good trade-off. And in the

following year, as positive word about WayCoolWebPlace spread
quickly over the Internet and the new marketing director gained
traction, Eds suddenly not-so-little business became highly profitable even as many other Web-related businesses began to have
trouble.
Dont hire employees if you cant learn

to delegate.
Some people really are born with an I need to do it myself
gene. Even when they understand the need to delegate, they
just cant. If this describes you, I strongly recommend that
you operate a one-person business. True, by definition this
will mean staying tiny, but it will also mean you have the
opportunity to create a business that perfectly fits your
personality. And if you choose and execute well, youll still
be able to make a very good living. Best of all, youll never
have to hold a meeting or get mad at others who just cant
seem to see or do things exactly the way you want them to.
Develop New Business Approaches

If youre easily bored by routine, you have a choice: move from one
business to another every few years in search of variety or use this trait as
a catalyst for innovation in your existing enterprise. Unleashing your
creativity is undoubtedly the most powerful cure for boredom and,
44
sensibly harnessed, it can work wonders to make a good business better.

Whether youre in a service, retail, manufacturing, or construction business,
your customers will respond positively if your business regularly introduces
new products and services. Even improving the way your business looks
and sounds will almost always be positively remarked on by your customers.
One approach I find helpful when I get a bad case of the ho-hums is
to pretend I am starting Nolo from scratch. Here are some questions I ask:
What would a new Nolo look like?
How would it communicate with its customers?
Who would we hire, and how would we organize them?
What current products would we no longer produce, and what
would we replace them with?
How would Nolos old and new products be priced and marketed?
If your business is successful, youll probably decide that you are already doing many things right, meaning that your mythical new enterprise
would look similar to your existing one. But I have a hunch that if you
are savvy enough to have created a superior business, youll have no
trouble finding dozens of significant ways to change and improve it. If so,
whats stopping you from implementing at least some of your best ideas?
High cost may be one answer. If so, you need to focus on the most
powerful ones that can also be implemented at modest cost. And if a truly
compelling new initiative will require a significant investment, be ready to
raise the needed funds. If your business is solidly profitable, you cant
afford not to make it better and, hopefully, in the process become reexcited about its prospects. If profitability is flagging and you have
nevertheless decided to persevere, there is usually even more reason to
consider implementing significant changes.
45
You cant do everything at once.

Some businesspeople have more ideas than they have time,
people, and money to implement them. If this describes you,
youll need to choose well. Make sure the new products,
services, and business methods you introduce really will
enhance your enterprises core competencies and, by extension, its profits. And before committing a major investment
to any particular initiative, find a way to test it at lower cost.
Successful small business ownersespecially those who become

jaded operating the same old businesssometimes try to take a successful
enterprise in a totally new and unexpected direction. For example, a
successful landscape gardener I knew fell in love with making jewelry
and hoped to transform his life by selling earrings to his gardening clients.
Unfortunately, his customers found his enthusiasm for jewelry off-putting
and not only resisted buying trinkets, but turned elsewhere to get their
lawns cut. Similarly, a restaurant owner who tried to turn part of her
establishment into an art gallery ended up with two failed businesses. As
these little stories illustrate, there is a huge difference between innovating
within a successful enterprise and embarking on a total departure from
the tried-and-true. Very few of us, it turns out, are smart and disciplined
enough to invent a second successful business while still running the first.
Invest Your Business With a Sense of Purpose

In Chapter 1, Build a Meaningful Business, I discuss in detail several reasons
why it is important to align your business with an altruistic purpose, such
as improving the environment, or teaching customers valuable new skills,
46
to mention just a couple. It not only makes sense to do this because it is

likely to make your business more profitable, but also because it will
make it more interesting. And although I can point to no study proving it,
Im convinced that entrepreneurs are far more likely to stave off boredom
and stay involved in their business over the long term if they believe in
what they do.
Fire Yourself/Hire Yourself

When I get completely fed up with my day-to-day work responsibilities, I
take a few weeks off. Often this is all I need to feel reenergized about
Nolo. But three or four times over my career, even an extended vacation
hasnt reawakened my entrepreneurial zeal. Instead, Ive returned from a
holiday feeling almost as enervated as when I left.
The first time this happened, the cause of my angst was not hard to
figure out. In the early 1990s, with close to 50 employees and growing,
Nolo had become too big and complicated for me to run on a daily basis
while still setting aside enough time to focus on the essential task of
developing new self-help law products. Gradually, as Nolo grew, the parts
of the business that bored me had all but crowded out the parts that drew
me to the office early on Monday morning with fire in my belly.
After more than a little soul-searching (my doctor would probably
have said I was suffering from mild depression), I sat down and made a
list of all the business tasks of which I was supposed to be in ultimate
charge. This turned out to be a very long list, including creating new book
and software titles, updating old ones, producing and printing them on
time, creating a marketing plan for every product, operating a warehouse,
supervising Nolos retail store, seeing that Nolo had sensible personnel
policies, creating a budget, supervising our accounting system, and helping
produce the Nolo News, our quarterly newspaper, to mention just a few.
47
Deciding that the only thing I was both best at and enjoyed the most
was Nolos editorial functiondeveloping Nolos new self-help law
contentI decided to fire myself from running all the rest. I knew I had
made the right personal decision when for the first time in quite a while I
found myself in a great mood. But I also knew my newfound euphoria
wouldnt last long unless I could find the right person to competently lead
all the essential business tasks I would no longer be responsible for. Fortunately, I knew just the person for the job: Linda Hanger, an experienced
publishing executive and friend who had worked for Nolo many years
before. And providentially, Linda, who was fed up with her increasingly
miserable daily commute to her job, where she ran several divisions of a
computer book publisher, agreed to become Nolos president, a position
she held from 1993 until 2004, when she resigned to head up Evan-Moor
Educational Publishers.
But as you might guess, I still faced the huge challenge of getting out
of Lindas way and letting her run the company I had cofounded and run
for more than 20 years. To get this process off to a good start, Linda and I
drew up a two-page document called Its a Deal. In it, we listed the
major functions of a publishing company, including writing and editing,
layout and design, financial management, marketing, publicity, printing,
warehousing, and shipping. We then made it clear that I remained the
boss only of Nolos book and software publishing activities. Linda would
be in charge of all the rest. In addition, each of us reserved the right to
express our opinions to each other (kibitz) about the decisions the other
had made.
From the beginning, our division of labor worked. No question, facing
up to the need to surrender long-held power was as wrenching as it was
exhilarating. But the important point was that I survived it (with loads of
help from Linda) because I clearly understood that only by voluntarily
giving up power would I have enough time to do the self-help law work I
48
loved. In short, firing myself from the parts of my job that had begun to
depress me allowed me to rededicate myself to the work that had originally
drawn me to help start Nolo. This lesson was so empowering I have
applied it twice more when I experienced similar bouts of boredom. In
1998, I fired myself as Nolos book and software publisher and hired myself to supervise Nolos fast-growing Internet operationsthen a relatively
new and exciting area of our business that simply wasnt getting enough
attention. Later, with Nolos Web strategy largely in place, I turned the job
over to people who better understood how to develop our Webby-winning
website and hired myself as executive publisher, to integrate Nolos
traditional and new media efforts.
Each time that I gave myself permission to shuck off work that bored
me and focus on tasks I looked forward to, I felt almost reborn. And best
of all, I accomplished these personal transformations without selling the
business, retiring, or becoming an absentee owner. Even more important,
I allowed Nolos estimable employees, many of whom have spent over 20
years with the company, a chance to continue to develop Nolo as a profitable enterprise. Whether your boredom threshold is high or low, one
thing is sure: The longer you run a business, the more likely it is that you,
too, will need to learn how to fire and rehire yourself.
Example:
Jed and Paul, brothers in their 40s, took over active management
of their dads vending machine business, Evergreen Vending, a
decade ago. With about 500 machines in operation, mostly located
at worksites with 50 to 150 employees, the brothers made a
decent living in part because they both worked hard keeping the
machines in good repair and full of soda and candy. Although the
business was doing well, increasingly Jed wasnt. Many days he
49
got up in the morning tired and grumpy, and told his wife that
just making it through the day seemed like wading through acres
of wet cement.
After ruling out physical illness, Jeds doctor explained that
he was suffering from depression, a condition that could probably
be improved by exercise, diet, and medication, but was undoubtedly also rooted in Jeds psyche (his soul, if you will). The doctor
suggested that Jed knock off work for a week, take a look at how
his life was going, and consider making some changes. Following
this advice, Jed realized that he had come to hate the repetitive,
boring nature of his job and that doing something about it was
imperative. Either he had to sell his share of the business and find
a new career (no easy task at age 46 with a limited education) or
find a way to feel better about his part of the work.
Fortunately, Dave, Jed and Pauls dad still worked a couple
of days a week to help out, made a good suggestion. Reasoning
that 20% of the machines almost surely generated the majority of
the profit, Dave proposed that instead of maintaining and filling
the machines, Jed spend a couple of months crunching numbers
to see whether he could come up with a plan to make the business
more profitable. In the meantime, Dave and other family members
would pitch in and cover Jeds routes.
To oversimplify more than a little, Jed quickly concluded that
Daves hunch was righta minority of the machines made most
of the profits. In part, this reflected the fact that vending machines
located at design firms, architects offices, and Internet-related
businesses, where many employees worked nontraditional hours,
produced far higher sales than those at warehouses, machine
shops, and other 9-to-5 operations. And interestingly, Jed also
established that a number of the more profitable businesses were
50
located fairly close together in one part of Evergreens territory,

meaning that they could be serviced with a minimum of driving.
Finally, after talking to the people in charge of facilities at
half a dozen of these companies, Jed reported that a number of
them were hungry for additional machines stocking less traditional,
but higher-margin, products, such as custom-brewed coffee drinks,
low-carb snacks, and burritos and other frozen food that could be
quickly heated in a microwave. As a result of Jeds work, and with
Paul and Daves enthusiastic agreement, Evergreen Vending
dropped 100 of its least productive or most distant machines and
replaced them with 150 machines at or near their most profitable
locations. The result was a substantial increase in profits. Jed
could now spend three days a week as marketing director so as to
further improve financial results while hiring a new employee to
cover his routes.
51
3
Understand How You Make a Profit
Business is a good gamelots of competition and a

minimum of rules. You keep score with money.
Nolan Bushwell
ou should be able to state in just a few sentences how your

business makesor plans to makea substantial profit. The
fact that so many entrepreneurs cant do this goes far to
explain why so few small companies are truly profitable.
Never Be Vague About Money

Because Nolo has succeeded over the years, a number of friends,
acquaintances, and even the best buddy of my second cousin have asked me
to spend a few minutes discussing their business plans. When we sit down
to talk, most of these folks are so excited about their entrepreneurial
dreams they happily chatter on for hours. In one instance, I hardly got to
say a word, but still received profuse thanks and a nice little present
when the three-hour meeting was finally over. I guess by just listening I
had confirmed the excited new businesspersons high opinion of her
business prospects.
When I do finally get a chance to actually comment on a business
idea, I typically ask for a short explanation of how the businessperson
plans to make money, something that is usually missing from the original
presentation. Often, the person acts surprised, as if I have not been listening. I remember one plaintively saying, Ive just told you the whole
thingdont you get it?
I tried to explain that although she had told me a lot about her
business visionand maybe buried in there somewhere had been some
information about how she hoped to make a profitI hadnt quite understood the dollars and cents of her plan. I asked her to grab a napkin or
the back of an envelope and quickly outline her key income and expense
numbers.
The hopeful entrepreneur took a deep breath and again started in on
the encyclopedic version of her plans, including even how she would
spend the big bucks she planned to make. This time I interrupted to
explain that describing entrepreneurial hopes is different than succinctly
explaining how youll make a profit. But what I really wanted to say was,
Get a job. Thats because I strongly suspected that like most hopeful
entrepreneurs who cant clearly explain how his or her business will earn
a solid profit, this hopeful woman would fail to achieve the success she
so eagerly sought.
One typical example of the pitfalls of this numbers-be-damned
approach involved a very bright woman who saw a business opportunity
in capitalizing on the popularity of a new type of stretching exercise. To
54
UNDERSTAND HOW YOU MAKE A PROFIT
exploit it, she decided to establish a national training and support center
that would provide publications, products, and seminars to teachers and
committed students. Excited about the possibilities and aware that similar
groups had done well in fields as diverse as yoga, Jazzercise, and tai chi,
she quickly established what amounted to a for-profit trade association for
this new activity. Her first steps included trademarking a clever name,
obtaining an 800 number, and sending out a press release describing her
organization. When a prominent news magazine picked up on the press
release and mentioned her new venture in a news you can use item, she
received over 2,000 phone calls on her 800 line in less than two weeks.
Too bad, she had nothing to sellno newsletters, classes, instructional
videos, or seminars. Even worse, instead of immediately focusing on the
steps necessary to produce these income-producing items, she ran up a
huge phone bill over the next six weeks excitedly talking about her vision
to everyone who called, from exercise devotees to potential investors to
just plain flakes. In fact, about the only thing she did right was to close
down her money-losing operation a few months later after someone else
grabbed her hoped-for market by quickly publishing what turned out to
be a highly successful series of books, guides, and videos on the subject.
Another man I talked to at length wanted to create a series of 40-page
booklets he named Antique Finders. Each booklet would be designed to
help consumers in a particular geographical area locate the best antique
shops. This enthusiastic, smart fellow had already spent hundreds of hours
locating the best antiques retailers in several cities and writing clever
descriptions of each. He had even paid a graphic designer to create
mock-ups of his first three guides. But unfortunately, he had spent no
time considering the first question I asked: How are you going to sell
enough of your pamphlets to make a profit, given that bookstores dont
sell pamphlets and America has no pamphlet stores?
55
His response was to again explain to me that because millions of

Americans collect antiques, and there are even successful TV shows on
the subject, surely there would be a huge demand for Antique Finders.
When I again pointed out that while everything he said was true, it did
not answer my question about how he was going to make a profit, he
became annoyed. Of course, Ive thought about the sales side of the
business. If it turns out that you are right and bookstores wont sell my
pamphlets, Im sure the antique stores themselves will.
I replied that I thought this was highly unlikely, since any antique
store that carried his booklets would be promoting other stores that their
customers might not otherwise know about. He literally scratched his
head and said, I didnt think of that.
Even though I strongly recommended that he spend no more time on
this venture until he could come up with a convincing profit plan, his
enthusiasm propelled him forward. One divorce and two years of entrepreneurial misery later, he had sold fewer than 1,000 pamphlets at a loss
of almost $100,000. Although, mercifully, he eventually put his inventory
of 25,000 pamphlets in storage and got a job, he still occasionally calls to
tell me about some new idea hes had to turn his Antique Finders into a
hot business.
Getting a Quick Plan on Paper

Opening the doors of a shop and hoping you sell enough Fiddlyhumps to
make a decent living is almost always an effective prescription for failure.
For starters, you need to know your costs: how much youll spend
purchasing the little critters, keeping them alive and happy, compensating
your sales staff, paying the rent, and covering what is likely to be a
surprisingly long list of other costs. Only then you can begin to figure out
56
exactly how many Fiddlyhumps youll need to sell each month, for how
many dollars, to cover those expenses and have an adequate profit besides.
Of course, being able to describe the details of how youll make money
wont guarantee success. Youll still have to create a marketing plan that
really will result in your selling enough Fiddlyhumps at a high enough
price. But understanding your numbers will give you a chance to succeed.
Unfortunately, its extremely easy to skip over this dollars-and-cents
step, a lesson I learned the hard way more than 25 years ago. One Fourth
of July, then-tiny Nolo was invited to participate in a flea market sponsored
by the Berkeley Coop, a consumer-owned grocery store. Nolo set up a
booth that sold damaged and slightly out-of-date books for a dollar or
two each, and almost literally raked in money.
That evening, with my pockets bulging with bills, I stopped by a
friends house for dinner and described my new vision to substantially
increase Nolo profits by regularly selling Nolos overstock at similar flea
markets. Fortunately, one of the other guests, who had considerable retail
experience, started to laugh. When I got over feeling hurt and asked why,
he replied, I bet when you add up all your costs, you worked a ten-hour
day for practically nothing.
To prove him wrong, I got out pen and paper and we went to work.
In addition to $20 to rent the space, $10 for supplies to make signs, and a
$15 promotional fee to be included in the flea markets ads and flyers, the
largest cost was paying the two Nolo employees who helped me run the
booth and transport the books to and from the Nolo warehouse. Although
both Noloids were happy to trade working on July 4th for time off on
another day, this was nevertheless a considerable cost. And then there
were a few hours of additional employee time to pack up the books the
day before the flea market and unpack the ones that hadnt sold the day
after. Add a couple dollars for gas, $10 to treat workers to lunch and it
57
turned out we had netted about $80. If, instead of working a 12-hour day
for no pay, I had also paid myself even $7 per hour, we would have lost
money.
So much for my dreams of making a profit selling bargain-priced
distressed books one by one. But as you can see, it wasnt until I carefully
worked the numbers that I understood that this clearly wasnt a business
Nolo wanted to be in. And fortunately, Nolo did eventually find a way to
get a few bucks out of our big pile of distressed merchandise. We began
selling much of it to what are called remainder outfits, companies that
buy publishers overstock for a few cents on the dollar and resell them to
bookstores who resell them on bargain tables. Although following this
approach we got far less per individual book, the fact that we sold in bulk
with minimal overhead costs meant we not only made a profit, but also
that I got to sleep in on the Fourth of July.
Okay, by now I hope youre convinced of the wisdom of grabbing
paper and pen (or your computer) and on one page, describing how you
make money now or, if your business is in the start-up phase, how you
plan to earn it in the near future. Again, dont try to explain how your
entire business will work as you would to a stranger. Just briefly set out
exactly where your profits will come from.
Let me predict that doing this will turn out to be a little tougher than
you first anticipated. To help you, the next sections contain some examples
of brief profit statements written by businesspeople who have thought
through how to accomplish this. Dont worry if you dont fully grasp
every detail of these statementsagain, these are back-of-the-envelope
profit forecasts, not formal business plans designed to explain to a
stranger how a business will operate.
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The Wisdom of Writing a Formal Business Plan

If you borrow money from a bank or other professional lender or sell
equity in your enterprise to a sophisticated investor, youll almost surely
be required to write a business plan, not just the quick profit forecast I
discuss in this chapter. But even if you (or friends and family members)
self-finance your start-up phase, I highly recommend that you prepare a
formal plan describing every aspect of your business in detail and demonstrating how it will become profitable.
Your plan should contain at least two key number-crunching components. First, youll need a profit and loss forecast, which helps tell you how
much money you realistically need to get started, exactly what youll spend
it on and how youll recover it, plus a nice profit.
Second, youll need a cash flow forecast. This tool tells you when
money will flow into and out of your business and alerts you should you
be in danger of running out. Since even a theoretically profitable business
can literally go broke if too much cash is tied up in accounts receivable, its
easy to see why its crucial to manage cash as well as profits.
One good resource is the book How to Write a Business Plan, by Mike
McKeever (Nolo). If you would rather let your computer do the walking, I
recommend Business Plan PRO (Palo Alto Software).
Making Money in Service Businesses

The dollars and cents of service businesses tend to be easy to explain.
When the main thing youre selling is time, its relatively easy to under-
59
stand what you need to do to make money, something that is usually

much tougher if you run a retail or small manufacturing business. For
example, to earn a good income, a lawyer needs only to sell a reasonable
number of hours each year while keeping control of overhead expenditures.
Similarly, if an attorney does poorly, its usually easy to spot the problem
not enough clients paying for her hoursand to fix it by improving
marketing efforts designed to bring in more work.
Similarly, other service providers, whether they are consultants,
plumbers, music teachers, exterminators, or massage therapists, should
quickly be able to state how many hours of time they must sell at any
given hourly rate to operate a financially successful enterprise. In some
fields such as plucking ducks for hunters, or making emergency house
calls to unplug sinks or toilets, its common to charge by the unit, or job,
not the hour. Fortunately, the math is no harder. For example, if a
successful duck plucker cleans and wraps 10,000 ducks per season at $4
each (before moving on to cleaning salmon for a similar fee), it wont be
hard to subtract his costs of doing business to arrive at a profit figure. And
even if you expand your business by renting more space or buying
additional equipment, the math needed to figure out how the business
will make a profit usually wont get much more complicated. As a general
rule, whether you charge by the hour or by the job, as long as your
service business can mark up its employees labor three to five times, all
will be well.
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Selling services is generally better than

selling stuff.
Chapter 16, Sell Services, Not Goods, details several fundamental reasons why its usually better to operate a service
business instead of a retail operation. The most important of
these is that you can generally set and defend decent profit
margins, because unless yours is one of the few service
businesses that faces overseas competition, your business
will compete against other local enterprises that must
compensate workers similarly. By contrast, if youre a
retailer or manufacturer, you will probably be competing
against giant technology-driven companies that use their
marketing clout to purchase goods produced by third-world
workers at unbelievably low prices. Finally, precisely because
youll likely compete with other small fry, chances are your
service business can be started with a relatively small investment.
Here are two decent profits statements for service businesses. As

youll see, each of these entrepreneurs has a good handle on the dollarsand-cents side of their operations.
61
Able, a House Painter

Im a house painter with a two-man crew. To pay them, cover other expenses,
such as the cost of my truck and equipment, pay my wife $15,000 to be a
very part-time bookkeeper and scheduler, and net $90,000 or more to
support my family, I need to gross about $215,000 per year. I accomplish
this by charging customers $50 per hour for myself and each of my two
workers; I pay my less-skilled employee $14 per hour and my highly experienced one $20 per hour.
Because I spend a good deal of time doing things that dont produce
income, such as bidding jobs, maintaining equipment, keeping my crew
supplied, and taking a vacation, I only bill about 800 hours of my own time
each year. So, to meet my goal I need to charge at least 3,500 hours for my
crew, which makes 4,300 hours all told. When the weather and the economy
are both good, I can often do better, meaning I can earn the $90,000 I need
to live on and put some money aside as well.
Ables BusinessDoing the Numbers
Revenue
Crew
Able
(3,500 hrs x $ 50)
$ 175,000
(800 hrs x $ 50)
40,000
Total Revenue
$ 215,000
Expenses
Equipment
Office
Marketing
Wages & benefits (crew, bookkeeper)
Total Expenses
Ables Personal Net
20,000
10,000
5,000
90,000
125,000
$
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90,000
Employees cost more than you think

The only truly efficient business is a one-person operation. If
you hire even a few people, otherwise productive time and
energy must be diverted to communication, coordination
and other management tasks, none of which makes the cash
register ring. Recognizing this, its important that each new
employee you hire make a substantial contribution to your
bottom line. If they do, greatyour management efforts will
more than pay for themselves. But if each employee you hire
doesnt make your business substantially more profitable,
you would probably do better to stop wasting your own
productive hours on what is by definition a low-profit activity.
Better to run a smaller business and concentrate on getting
the maximum possible return for your own time.
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Wilbur, an Attorney for Small Businesses

I try to work a 35-hour week, not counting hours I spend keeping up on my
field through reading and attending legal education classes. With five weeks
off each year, this means I have 1,645 hours to sell. I share an office with two
other lawyers; my portion of office rent, salaries for our own full-time
secretary and paralegal, and other expenses are about $100,000. In addition,
I spend about $25,000 entertaining clients, taking classes, and subscribing to
professional publications. Obviously, I have to cover this $125,000 nut
before I pocket anything. My goal is to bill at least 80% of my 1,645 working
hours (or 1,316 hours) at $225 per hour, bringing in just under $300,000.
This leaves me with a net of about $170,000 after covering expenses. But
because I also have a couple of retainer contracts (clients with continuing
legal needs who pay up front for my time whether or not they use all of it)
that net me substantially more than $225 per hour, I do a little better.
Wilburs BusinessDoing the Numbers
Revenue
Billable hours
$ 296,100
Retainers
Total
30,000
$ 326,100
Expenses
Office rent and secretarial services
Entertaining
Publications, professional dues, classes
Business travel
Total
Wilburs Personal Net
$ 100,000
15,000
5,000
5,000
$ 125,000
$ 201,100
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Making Money in a Manufacturing or Retail Business

Businesses that must carry inventory, like a store, or buy new materials or
components, such as a manufacturer or publisher, face a tougher task than
do service businesses in understanding how to make money. It follows
that your back-of-the-envelope profit statement will necessarily be more
complicated. And if something goes wrong with one part of your business,
as would be the case if sales of a couple of new products are disappointing,
youll have a tougher job reducing expenditures than would a service
provider. Nevertheless, it should still be possible to demonstrate that you
understand what it takes to make a good living by producing a reasonably
straightforward, albeit slightly longer, profit statement.
Heres the story of one business owner who does have a good
handle on just what she needs to do to make a reasonable profit.
Felice, a Book Publisher

I publish regional guidebooks to restaurants, bed and breakfasts, excursions
with kids, and the like. My goal is to gross $1 million a year and net a 9%
profit, or $90,000. To do this, I need to develop and maintain a list of 20
core titles that sell 5,000 or more copies annually at an average cover price
of at least $20.
If I meet that sales goal, I end up with $1 million after wholesalers and
retailers take their 50% cut. My total cost to manufacture each book is about
$2, or $200,000 per year, all told. I pay my authors a royalty of 10% of my
net receipts (10% of $1 million, or $100,000). This leaves $700,000. I pay
$40,000 annually to buy and lease equipment. Rent and utilities cost
$30,000. Book storage and shipping cost $50,000. I pay my core staff of two
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editors, two marketers, one graphic designer, one secretary/receptionist, and

a two-day-per-week bookkeeper, almost $350,000 per year, counting benefits.
I freelance most other tasks I dont do myself, for a total expenditure of
$140,000 annually. Additional miscellaneous expenses total $10,000. The
$80,000 thats left is what I take out of the business each year.
Felices Publishing Business Doing the Numbers
Revenue
Gross sales at retail
$2,000,000
Net receipts
$1,000,000
Cost of Goods
Manufacturing ($2 per book)
Author royalties (10% of net)
Total cost of goods
200,000
100,000
$ (300,000)
Expenses
Rent and utilities
Equipment (lease and purchase)
Book storage and shipping
Salaries and benefits for 61/2 employees
Payments to freelancers
Miscellaneous
Total expenses
Profit
30,000
40,000
50,000
350,000
140,000
10,000
($ 620,000)
$
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80,000
Unfortunately, most new shop owners, small manufacturers, and

restaurant ownerswith the exception, of course, of those who have a
head for numbers and deep experience in the fieldare not sure what it
will take to make their enterprises profitable. This helps explain why so
many seemingly popular small retailers come and go. Their owners, it
turns out, never quite understood how much they needed to mark up
their goods at a given sales volume and inventory level to cover their costs
(rent, salaries, the cost of carrying inventory, marketing expenditures) and
make a decent profit.
Goodwill doesnt count.

Often when nave businesspeople pencil out the dollars and
cents of a business, profit turns out to be thin or even nonexistent, as was the case in my flea market example. Instead
of just facing the truth that without adjustment the business
wont work, it is common to argue that although start-up
costs are high, exposing the business to lots of customers will
eventually pay off (as if somehow a profit would eventually
materialize from all the people Nolo introduced to its books
at the flea market). Sorry, but business doesnt work that
way. Each business endeavor should make economic sense
on its own. And if it doesnt now, there is little chance things
will be different in the future.
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Of all business expenses, the substantial cost of keeping an inventory

of merchandise is usually the least well understood and accounted for.
For instance, if you typically carry $200,000 in inventory, your profits must
be large enough to cover the cost of tying up this investment as well as
all the other expenditures necessary to keep the doors open. If you use a
bank line of credit to cover some or all of your inventory investment, the
cost to carry inventory might be $10,000 to $20,000 per year, depending
on how fast things sell.
Example:
Tamara dreamed of opening a shop specializing in handmade
Southwestern furniture. She located a large, bright space near the
affluent residential area that she expected to produce the bulk of
her customers. Everything seemed great until she looked closely
at the numbers and found that the cost of maintaining a large
floor of furniture in a reasonably pricey location would gobble all
her anticipated profits and then some. Disappointed, she pulled
back and rethought her business plan.
The next year, she was back with a new one. This time, she
would work with just a few high-end furniture makers. She would
ask each to supply her with floor samples of their tables, chests,
chairs and other items, allowing customers to place orders, for
which they would pay in advance. Tamara would then transmit
the orders to the workshops where the furniture was built. Free of
the need to tie up money in inventory, Tamara next searched for
and eventually found a much smaller, cheaper showroom in a
light industrial area that was not too far from the upscale residential
area from which she expected to draw most of her customers. Now,
with far lower overhead costs, Tamara was able to come up with
a back-of-the-envelope plan that showed her making a tidy profit.
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Add a service component to a retail

business.
A low-profit retail enterprise can often do far better if it also
operates a higher-margin services operation. For example, a
bookstore specializing in building and design books could
also make referrals to contractors and builders, for which it
would receive commissions. In this business model, the lowmargin retail business is primarily designed to provide a
steady stream of customers to the much higher-profit services
business.
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4
Start on a Shoestring
Nothing great was ever achieved without enthusiasm.

Ralph Waldo Emerson
oull never succeed unless your business is adequately capitalized. Youve probably heard or read this many timesbut
frequent repetition does nothing to improve bad advice. On
the contrary, one of the biggest mistakes a novice business owner can
make is to have too much money too soon.
Why Small Is Better

People who start their small business on the cheap, often in a garage, den,
or some other scavenged space, and create their first goods or services with
more sweat than cash, have the luxury of making their inevitable rookie
mistakes on a small scale. And precisely because their early screw-ups
dont bury them in debt, they are usually able to learn and recover from
them. In short, assuming you really do have an idea for a better mousetrap and the knowledge and passion needed to create a superior business
to sell it, youll almost surely do better if you have to count your pennies
during your start-up stage. Hewlett-Packard, Apple Computer, and Nolo
are just three examples of the many thousands of successful enterprises
that called a garage or attic their first headquarters.
Starting a small business on the cheap also helps you more quickly
determine whether or not your entrepreneurial idea really does have the
potential to succeed. Absent money in the bank or your dads checkbook,
you must quickly face the truth. Can you sell enough whatchamacallits for
enough pennies to pay your business expenses and put enough dollars in
your pocket to buy groceries and pay the mortgage? If you cant, its better
to find out early and move on to something else.
By contrast, novices who begin a new business by rounding up
investment capital or borrowing a wad of cash are likely to spend a
substantial portion of it foolishly. Commonly, they pay for a nice office,
state-of-the-art equipment, or a new vehicle instead of focusing their
dollars on what really makes their business tick. By the time experience
teaches them that a thick rug and leather couch dont help make a profit,
it may be almost impossible to dig themselves out of their financial hole.
For a vivid example of this riches-to-rags scenario, consider how and
why the dot-com balloon that soared so high at the end of the last century
popped so quickly at the beginning of this one. Certainly, one big reason
was that investors showered far too much money on inexperienced managerspeople who had optimistic PowerPoint presentations, slick offices,
and fat salaries but no authentic knowledge of how to run a profitable
enterprise. But the flood of money also meant that even people with
potentially sound businesses took them from idea to full-scale, heavily
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START ON A SHOESTRING
financed execution with no opportunity to learn how to become profitable.

The fact that thousands promptly fell to earth despite starting with millions
in the bank should come as no big surprise.
When the dot-com pioneers ran out of venture capital and flamed
out, established enterprises in many fields, including toys, pharmaceuticals,
cosmetics, and clothing, picked up the pieces of crashed companies for
pennies on the dollar and began the patient process of business building.
Executives of these seasoned enterprises knew the basic facts of business
life, and many have succeeded.
But buying once-high flyers at federal bankruptcy court hasnt proved
the only way to succeed in the world of e-commerce. Thousands of niche
sites started on the cheap by ordinary folks investing and pinching their
own pennies, have also done well. Whether its selling jewelry made in
Estonia, first editions of the work of 19th-century English novelists, or
vintage baseball cards, plenty of small Web-based operators have been
willing to learn the Internet ropes before, not after investing large sums.
Surely there are exceptions to the frugal is better start-up argument.
After all, its impossible to start an upscale restaurant on a shoestring, right?
Dont be so sure. True, thousands of expensively equipped and decorated
restaurants open every year. But its also true that after an initial period of
new-kid-on-the-block popularity wears off, most struggle and fail. Recognizing that location, marketing savvy, pricing and the state of the economy
are among the many factors that determine which restaurants will be among
the winners, undoubtedly the biggest reason why so many glitzy eateries
struggle is that customers just dont find their food good enough to return
over and over.
When a fancy, new restaurant begins to struggle, its not hard to
predict what will happen next. Faced with a half-empty dining room night
after night, the worried restaurateur is likely to look for a quick fix: tinker-
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ing with the menu, attempting to copy the business practices of successful
competitors, lowering prices, or offering early bird specials. If all this
fails, the chef may be firedor quit anyway because of all the new restrictions on his artistic freedom. Given enough time, a persistent owner
may begin to get the formula right. But by the time customers really are
pleased with the food, service, and prices, it is often too late to save the
business. Payments on the bank loan needed to cover all the expensive
equipment and decor are likely to be far overdue, investors reluctant to
put up more money, and even the owners marriage may be headed for
trouble.
Now lets look at an alternate scenario of opening a new restaurant
one, incidentally, that is based on a real story. It begins with Eileen, a
young woman determined to start a small restaurant even though she has
saved less than $10,000 and doesnt run with a deep-pocketed crowd.
Although she knows a lot about food and loves to cook, Eileen realizes
that before she reaches for her slim checkbook, her first task is to learn
far more about the business. She starts by getting a job as a hostess at a
successful restaurant she admires. Each evening after work she makes
copious notes about what works and what doesnt. After four months,
Eileen transfers to the food preparation side of the business and again
spends every free minute studying and recording how the kitchen operates.
Eileen also finds and reads everything she can about operating a
small restaurant at a profit. Before long she knows how much shell need
to mark up food and wine, and what percentage of her gross should go
for rent, salaries, and to amortize the cost of equipment. And crucially,
she understands that to succeed with a dinner house shell absolutely
need a license to serve beer and wine.
When Eileen believes she has learned enough of the basics, she sets
up a meeting with an experienced commercial real estate broker to ask
about the possibilities of getting into business on the cheap by taking
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over the lease of a failed restaurant. The broker confirms Eileens hunch
that a landlord with a building full of equipment but no tenant may be
willing to take a chance on a new operator, even one with more energy
than experience.
Whenever a small local restaurant or cafe goes out of business,
Eileen checks out the situation, each time learning a bit more about what
it takes to do a deal. Once or twice she seems close to leasing a desirable
spot, but each time is beaten out by someone else with more money or
experience. Finally, when the owner of the tatty old Red Brick Caf has a
stroke and the business simply closes because no one wants to take it on,
Eileen gets her chance. Although the kitchen equipment is prehistoric, the
dining area threadbare and the location marginal, two things are absolutely
right: the rent and the easily transferable beer and wine license. By paying
the retiring owner $8,000 for his equipment (half in cash and half with a
promissory note to be paid over two years) and assuming the last year of
his lease, Eileen is finally ready to begin.
Her first step is to give herself a few weeks to spruce up the place.
Instead of calling an architect and planning to do lots of expensive
remodeling, Eileen and a small army of her closest friends repaint the
interior themselves. When she runs into what looks like a budget-busting
problemthe old pink tablecloths are disgusting and the tables too
scarred to go withoutshe improvises by filling in the dents and nicks
with plastic wood and then painting the tables bright contrasting colors.
Eileen then orders stylish but low-cost paper placemats just like the one
she saved years ago from a cool little caf outside Florence. Finally, she
buys small inexpensive vases and dresses up each table with a fresh
flower from her garden.
To reflect her strategy of serving just two or three gourmet entres
each evening at a very competitive price, Eileen renames the old place
The Humble Gourmet. She reasons that if her food is good enough, price-
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sensitive customers who appreciate a quality meal will gladly forgo a big
selection in exchange for an affordable bill. To this end she targets young
adults without children and older empty-nesters who are either saving for
retirement or have already retired, reasoning that both groups like to eat
out a lot if they can do so at a reasonable cost. And to help people worried
that on any given night they might not like anything on her small menu,
Eileen decides to post her selections two weeks in advance, both on a
board outside the restaurant and on a bare-bones website.
Understanding that her approach might take a while to catch on, and
painfully aware that she has next to no financial cushion, Eileen sets out
almost maniacally to promote The Humble Gourmet. Adopting the old
saying marketing is a contact sport as her motto, she starts by sending a
short letter to everyone on the extended mailing list she and her friends
have been creating for over a year. Briefly explaining her dream of serving
delicious, stylish food at a reasonable price and asking each person for
their support, she includes a coupon good for a free dessert. When her
letter-writing campaign turns out to be surprisingly successful, Eileen asks
customers to add people to her mailing list, which she keeps posted
along with a convenient pen just inside the front door. Impressed by her
spunk, a surprising number of people contribute names, and a few even
plan dinner parties at the restaurant.
Each evening, as patrons leave her restaurant after what she hopes
has been an enjoyable meal, Eileen personally thanks them. She also
hands out a little packet containing a cleverly designed Humble Gourmet
refrigerator magnet along with a brief flyer explaining her dream of
providing excellent food at a reasonable price. Many people smile, nod,
and later deposit the flyer unread in their circular file. But pleased to
receive the clever little magnet, a good number take the time to read
Eileens material. And best of all, a substantial minority are willing to
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come back often bringing their friends. To thank this core group of
supporters, Eileen periodically holds a free wine-and-hors doeuvre party
with music supplied by her boyfriends ensemble (free, of course).
Eileen also adopts an unorthodox media strategy. Instead of trying to
convince jaded restaurant critics that her kitchen produces the most exotic
meals in River City, her press materials emphasize her determination to
each night serve a small but interesting selection of excellent food at a
very fair price. She also points out that she works with a couple of tiny
family wineries to serve house wines that are both interesting and affordable.
Attracted both by her modesty and pluck, critics who stop by are impressed
by The Humble Gourmets fun atmosphere and, given their lowered
expectations, find that meals are pretty darn good. Before long, The
Humble Gourmet is receiving favorable media mention, including a feature
in an influential local weekly newspaper entitled The Little Restaurant
That Could and a column in a major daily titled Ambitious Food at a
Modest Price.
After ten months of hard work, Eileen realizes that she has a potential
success on her hands. But she is also wise enough to understand that her
shoestring operation is stretched dangerously thin. Fortunately, now, with
positive cash flow as well as black ink on the bottom line, she can afford
to make improvements. She starts by talking to Tom, her landlord, about
making essential changes to the kitchen. Tom, who has long since joined
Eileens core group of believers and is hopeful shell remain as a longterm tenant, agrees to replace the wretched old stove and refrigerator with
state-of-the-art models he is able to pick up cheap when a nearby restaurant fails. Even more important, Eileen dedicates some of her positive
cash flow to hiring Mary, a talented cook with the experience to help her
improve the variety and quality of the meals. And noticing that customers
who get splinters are less likely to come back, she spends a few more
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dollars replacing the old tables with tasteful new ones. Now the cool
placemats and fresh flowers really do look good.
But before she goes very far with her improvement plan, Eileen turns
her attention to the lease, realizing that its silly to further upgrade the
restaurant until she and Tom have worked out a long-term deal. Understanding Eileens needs almost as well as she does, Tom offers to remodel
and expand the dining room if Eileen will agree to a five-year lease at a
somewhat higher rent. At first Eileen hesitates, unsure that she is experienced enough to run a larger restaurant. And she also wonders if her
customers will be turned off by a more upscale facility or drift away while
the restaurant is closed for the six weeks it will take to get the work done.
Sensibly deciding to deal with these very different worries separately,
Eileen first decides to confront her concern that she doesnt have enough
experience to operate a bigger house. To this end she approaches Mary,
her cook, and Rolf, her de facto business manager, and asks if they would
be willing to become minority partners in exchange for making a longterm commitment to help her expand. When both answer yes, and the ink
on their partnership agreement is dry, she asks them to join her in closely
examining Toms remodeling and expansion proposals. After much back
and forth, they all agree on a plan that will increase seating capacity by
35% while changing the pleasantly down-to-earth character of the restaurant as little as possible. And after Eileen and her new partners sign the
five-year lease, they work with Tom to execute the remodeling in the
middle of the next summer, when many regular customers will be on
vacation. The result is that in September of its third year, The Humble
Gourmet reopens as one of the simplest, but nicest, restaurants in town,
and Eileen and her junior partners join the ranks of successful local
businesspeople. Eileen celebrates the event by retiring her 15-year-old
Honda Civic in favor of a shiny new Saturn wagon.
78
How can you apply the lessons of Eileens shoestring business

success to your endeavor? Start by examining how she succeeded. First
and most important, she focused most of her attention on the core value
of her business: Gourmet food at a reasonable price. Second, short of
cash, she made a virtue of frugality. And third, she determined who her
customers were and adopted a marketing plan calculated not only to
reach them, but to engage their enthusiasm so that they became The
Humble Gourmets active supporters. (See Chapter 7, Target Your
Customers, for more on how to identify and reach customers intelligently.)
In every field there are many models for success (and even more
ways to fail). No question, if you want to open a Spanish-style bistro with
a tile floor, copper-topped bar, and an open kitchen, youll have to invest
more than Eileen did. But no matter how much you plan to spend, the
key is to invest wiselysomething thats very difficult to do unless you
already know your field extremely well. If not, youll almost surely be
better off placing your money in a good-quality mutual fund and forgetting about being an entrepreneur.
Spending Money Wisely

Commonly, new businesspeople not only spend far too much for items
they need, but also make expenditures that dont have the remotest possibility of benefiting the business. If I had $20 for every new entrepreneur
Ive seen lease a luxury car no customer will ever sit in, or expensively
remodel an office only a few employees ever see, I could pave my patio
with portraits of our seventh president.
The fastest way to make a dollar is to hang on to the one you already
have; by definition, you get to keep the whole 100 cents. By contrast,
earning a dollar by selling most types of goods or services is much
79
tougher. After you first subtract your out-of-pocket costs of doing business,
and then the value of your own time, youll be lucky if you only need to
gross $10 to pocket the same buck. So next time you are tempted to buy
something you dont absolutely need, ask yourself how likely it is that
your expenditure will quickly bring in ten times that amount in revenue.
In most businesses, often the honest answer will be somewhere between
a long time and never.
Here is a quick review of some kinds of expenses that commonly get
out of hand, along with some commonsense suggestions for how to keep
them in check. If youve already been in business for a while, youll almost
surely be able to add to the list.
Office Decor
Spending money to create an upmarket image may make some sense if
youre selling expensive jewelry or running a posh hair salon. But in the
great majority of small businesses, where you and perhaps a few employees
are the only people who regularly use your office, its a huge waste. It just
doesnt make sense to drop a few thousand dollars so you can feel good
sitting behind a cool new desk. Serviceable used office furniture, much of
which has likely been repossessed from failed spendthrifts, is easily
available for a fraction of the cost. And even if customers or clients will
regularly visit your workspace, most will be more favorably impressed by a
utilitarian atmosphere than one of opulence.
Electronic Gizmos
Many business owners could cut their electronic equipment expenditures
in half and still be spending way too much. For reasons that have more to
do with stroking ones ego than common sense, its easy to toss away a
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lot of money on the latest model electronic organizer, digital camcorder,

or other flashy gizmo your business never really needed in the first place.
But even more money is wasted by purchasing gold-plated models of
essential equipment such as computers, copiers, phone systems, and
tools, when stripped-down but adequate models could be bought or
leased for a fraction of the cost. If you really cant be happy without
surrounding yourself with cool paraphernalia, at least buy it used. As with
office furniture, great deals are commonly available at the going-out-ofbusiness sales of less wise entrepreneurs.
It may be useful, in fact, to think of your cell phone as a proxy for
your business spending habits. Recognizing that, especially if youre
frequently on the move, this handy little tool will greatly increase your
efficiency, its also true that, if you hand one out to every employee, your
bill is likely to go up a lot faster than your businesss productivity. Or put
another way, by purchasing basic phones and making them available only
to people who really need them, and sensibly monitoring charges,
businesspeople I know could cut their cell phone bill in half with no loss
of income. And if they applied the same half is more discipline to most
other business coolest new model expenditures, they would find it far
easier to make a profit each month.
Advertising
Advertising is another place where inexperienced small business owners
(and plenty of veterans as well) frequently waste significant dollars. As
discussed in some detail in Chapter 8, Market Your Business Creatively,
much, if not most, money paid for advertising could be far better spent in
other ways. And this is doubly true when a business owner hasnt yet
developed the experience to know which types of advertising are effective.
Lets return for a moment to Eileen and The Humble Gourmet. Suppose
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instead of her letter-writing and word-of-mouth marketing campaign,

Eileen had tried to promote her restaurant by ads in local newspapers or
other media. Given the relatively high cost of buying even a few display
ads, its unlikely Eileens advertising campaign could have come close to
covering her expenses. No question, some types of ads, such as those in
the Yellow Pages, can be cost-effective. But again, as further discussed in
Chapter 8, generally, small business owners should advertise sparingly
and only as part of a well-thought-out campaign carefully designed and
tested to reach the most likely customers at an affordable cost.
Instead of splashing out lots of money advertising your business,
plan to encourage satisfied customers to recommend your business to
others. And remember, restaurant customers arent the only people who
make purchasing decisions based on positive word of mouth of knowledgeable friends. Whether you are a dentist, chiropractor, roofer, or
painter, most of your new business will come by personal referral, not in
response to ads. In Chapter 8, Market Your Business Creatively, I discuss
a number of reliable ways a new business can get this referral process
started.
Consultants and Professionals

Paying consultants and professionals, including lawyers and accountants,
too much is another way many new businesspeople waste money. Ive
known a number of aspiring publishers whose first step has been to hire
a consultant, often at upwards of $100 per hour, to help them get their
business off the ground. Unfortunately, the information they purchased
was rarely worth the cost. You can efficiently gather most of what you
need to know to start a small business at a fraction of this amount in
several ways: by apprenticing for an existing business, reading trade
magazines, how-to books, and online business information, attending
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industry trade shows, and asking for free help and advice from people
already in the business. This is not to say that it is never wise to hire an
experienced coach to help with the start-up phase, only that if you plan
to buy information at a hefty hourly rate, you should first glean as much
as possible for free.
Example:
Jenny, an English teacher and lifetime amateur gardener, decides
to retire early to write and publish a series of local gardening
guides. By tightly focusing her horticultural advice on her extended metropolitan areas many microclimates, she believes she
can create publications that will have a significant marketing edge
over the one-size-fits-all national gardening books that dominate
the market. Wondering how to print and distribute her planned
titles, Jenny asks a friend to introduce her to Mavis, a successful
local publisher of restaurant guide books. Mavis is kind enough to
accept Jennys lunch invitation, and the two women spend a
pleasant hour bonding. When the coffee cups are cleared, Mavis
smiles, reaches in her bag and gives Jenny a list of the printers,
wholesalers, and retailers her company uses, remarking, When I
started, a very generous, established publisher did this for me, so
now its my turn to pass on the favor. She then explains that
dealing successfully with established printers is mostly a question
of being sure you are being offered a competitive price. Mavis
goes on to explain how she has at least three printers bid on
every title. Then explaining that its much easier to write and
manufacture a title than it is to sell it, she suggests that Jenny hire
David McCloud, of the Tactical Bookmarketing Group, to help
coax area wholesalers and retailers to stock Jennys books.
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Similarly, when it comes to the nuts and bolts of getting your business
established as a legal and tax entity, there is no need to spend big bucks
on professional help. Many sole proprietors should be able to pay less
than $100 for all the licenses and permits they need to get started. If,
instead, you decide to form a partnership, corporation, or limited liability
company (LLC), you have available a plethora of top-quality self-help
materials published by Nolo and others. Even if you choose not to do
necessary legal work yourself, it makes sense to educate yourself on the
basics before hiring a professional. That way, you wont be paying a lawyer upwards of $200 an hour to teach you routine legal information, but
will be billed only for the tasks or advice you really need. For example,
many lawyers charge upwards of $1,000 (often many dollars more) to
form an LLC for your business, so you can enjoy freedom from personal
liability for most business debts at the same time that you can report
business taxes on your personal return. By contrast, you can safely and
quickly accomplish this same legal task using Nolos LLC Maker software
for less than $60.
Further reading on small businesses.

Nolo also publishes an excellent series of small business
books, including titles on starting a small business, 50-state
incorporation, partnerships, forming an LLC, and many
more. For more information, check out the free Small
Business section of Nolos online Legal Encyclopedia
(www.nolo.com).
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Employees
Rather than staffing a new business to meet your fondest hopes, its far
better to keep your money in the bank and start with a small staff, even if
it means imposing on the goodwill of family and friends for a few
months. This way, if business is slower to develop than you hope, no
money will be wasted on unneeded wages. When and if you really need
more employees, youll be able to afford them. Even if once you open,
business is surprisingly robust, and you need to hire additional help right
away, keep control of your enthusiasm and staff up conservatively. Hiring
temporary workers until you see how much permanent staff will really be
needed can be one good approach.
Never try to impress new employeesor yourselfby throwing out
overly generous salaries or benefits for managers and employees at the
high end of your pay scale. During the start-up phase of your business,
when every dollar is precious, its essential to pay most workers fairly but
modestly. (In Chapter 9, Hire and Keep Good People, I also explain why
it does make sense to pay people at the very low end of your pay scale
generously.)
Space
Dentists, lawyers, accountants, and consultants are among the small
business owners who often convince themselves its wise to invest lots of
money in fancy digs. In fact, spending money on elegant offices is often
counterproductive, because customers and clients understand exactly who
is footing the bill. Its usually far better to spend half as much on modest
but pleasant space, investing some of the dollars you save in providing
free parking.
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Upscale retail and other businesses that need to reach an affluent

clientele also commonly overpay for a premium location. Many of these
businesses would have a far better chance to succeed if they took the
time to find a cheaper spot that nevertheless offered easy customer access.
Then, instead of busting their budget on rent, they could use the same
dollars to build a business so compelling that customers would seek it out.
Should you doubt this is possible, think of the excellent small businesses
you and many others patronize that are located in warehouse districts or
other atypical locations. If they can find a way to pay a reasonable rent
and still reach their customers, why cant you?
Many small businesses can be sensibly located just about anyplace,
including a spare bedroom. This is certainly true of Internet businesses,
some of which can operate from a large closet. So, especially if your
business does not depend on walk-in traffic or personal contact with
customers, dont pay for space you dont really need.
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5
Get and Keep a Competitive Edge
The secret of business is to know something that

nobody else knows.
Aristotle Onassis
reating and maintaining a clear edge over your competitors is

crucial to small business success. Fortunately, there are lots of
ways to positively distinguish your business in customers
minds. Too bad that just opening the doors and hoping lots of customers
come arent among themif they were, many more businesses would
succeed.
You would think that the value of building a business around a
competitive edge would be obvious. Think again. It never seems to occur
to most entrepreneurs to look for ways to outthink their competitors,
which is a huge reason so many never become solidly profitable. All over
America, independent coffee shops, not savvy enough to give people a
good reason to prefer them, struggle for survival in the shadow of mediocre
chain outlets. Similarly, the typical pet food outlet, chiropractor, sandwich
shop, or freelance bookkeeping service enjoys little or no edge over the
ever-present herd of similar businesses. True, because pets and people
need to eat, and the IRS and sore feet are always with us, these look-alike
businesses may nevertheless make a few dollars. But unless one of them
designs itself around a clear and compelling edge, such as better knowledge, business methods, or a terrific location, its unlikely to attract enough
loyal customers to prosper over an extended period.
Even when an undistinguished small business does do well (perhaps
because its location is great, its product or service is temporarily in short
supply, or its prices are low), it is almost sure to attract competition. And
unless the profitable business smartens up and finds a way to distinguish
itself, these competitors will eventually find a way to siphon off customers.
This, of course, is just what happened in the last few decades to many
pioneering video stores, quick oil changers and photocopy shops. In each
instance the new service was in demand, and businesses that entered
these fields early often did very well. But because their business formulas
were so easy to copy, deep-pocketed competitors quickly flooded in, and
all but the cleverest small operators saw most of their profits vanish.
Convincing Customers That Youre Special:

An Overview
Building an edge into the very fabric of your business is crucially important
to long-term success. Heres a short list of the best ways to do this (truly
successful businesses typically find ways to combine several of these
competitive advantages).
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GET AND KEEP A COMPETITIVE EDGE
Unique knowledge. Knowing more than your competitors is one

of the best and most authentic ways to make your business stand
apart. For example, Jen, a Korean-American, establishes a website
aimed at providing up-to-date information about Koreas capitol
city to Western business travelers and tourists. Relying on relatives
and friends in Seoul to post up-to-the-minute information, Jen is
able to keep the site fresh, exciting, and heavily trafficked. The
happy result is that Korean hotels, restaurants, and other businesses that cater to Western visitors buy copious amounts of
advertising space on her site.
A way of doing business that produces a clearly superior product.
Mountain Magic, a publisher of climbing guides whose editors
are themselves cutting-edge climbers, produces far better mountaineering books than do traditional multisubject publishing
companies, whose editors tend to be caf-loving English majors.
An ability to produce or distribute products more efficiently
than competitors. Loads of small New Mexico galleries and shops
sell jewelry, pottery, and other products handcrafted by a small
roster of local artists and artisans. Looking to enter the business,
Penny concludes that she can do better if she can broaden her
market. Accordingly, she creates a catalog and website offering
the wares of many skilled Native American silversmiths, potters,
and weavers. This allows her to reach customers everywhere,
without waiting for them to happen through Santa Fe or Taos,
and justifies her decision to work with a larger group of creative
people.
A deviant business model. Loads of successful businesses are
based on providing goods and services considered weird, deviant,
or just plain strange by mainstream Americans. When entrepreneurs
choose wisely, its amazing how fast many of these oddball
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businesses do extremely well. If you doubt this, remember that

businesses based on organic gardening, bodybuilding, and
bicycle touring, which were commonly considered to be bizarre
40 years ago and are now as mainstream as many, are profitable.
Businesses providing tattoos, body piercing, and sex toys offer
more current examples of fields where the deviant became the
norm seemingly overnight. As discussed in Chapter 1, Build a
Meaningful Business, Nolo was founded, and in many ways still
is, a deviant business, based on its message that people, not just
lawyers, can competently cope with legal issues. The entrepreneurial point, of course, is that when a business is considered
deviant, you are by definition embracing new ideas and pioneering
a new field. And assuming youre right in picking an area which
will soon attract others, the fact that you are near the head of the
line should position you to reap substantial profits. To learn
more about how and why deviant enterprises often succeed, grab
a copy of The Deviants Advantage: How Fringe Ideas Create
Mass Markets, by Ryan Mathews and Watts Wacker (Crown).
A better location. Andr dreams of opening a butcher shop like
the ones he knew as a kid growing up in France. Realizing that it
will be no easy task to compete with American supermarkets and
warehouse clubs, Andr searches for an affordable location easily
accessible to a large number of people who are willing to pay a
little extra for superior meat. He finally finds it when a small
storefront becomes available across the street from a popular
specialty produce mart. Reasoning that many people who seek
quality fruit and vegetables will also want to buy better meat, Andr
moves in. When his hunch proves correct, a fish market, bakery,
and coffee store follow, and the location is enhanced for all.
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An innovative product that is hard or even impossible to imitate.

Walter makes unique toys, and protects each design by patenting
it. He then markets his creations to toy companies that find it
cheaper and easier to purchase the novel toys from Walter than
to try to design around his patents.
Better customer access. John, whose dry cleaning shop is located
on a typical small city main street with inadequate parking, moves
a few blocks to an out-of-business gas station, which allows him
to rebuild his business around easy customer access. Not only
can drivers now park free right in front of the shop, but Johns
well-staffed service counter means that a typical customer is in
and out in less than three minutes.
Superior customer service. Ivan, a mobile knife sharpener whose
business is based on bringing a large, fully equipped van to
businesses and other venues where people can conveniently get
their knives sharpened, has a big competitive advantage over
shop-based competitors.
Up-to-the-minute knowledge about a fast-developing field.
Jasmine, a young New England business attorney realizes that in
her area lawyers are as common as March snow (and about as
welcome). So, she specializes in cutting-edge biotechnology law
concepts. Her specialized knowledge distinguishes her from 99%
of the other business lawyers and, to biotech clients, makes her as
welcome as springs first crocus.
A distinctive business style. Molly Wilson incorporates her threeperson business, Wilson, Inc., which specializes in trying to find
flaws in the websites of major corporations. Unlike her competitors,
many of whom are barely housebroken hackers, Molly deliberately
runs Wilson, Inc. in a buttoned-down way. This includes formal
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stationery, brochures, business cards, her own elegant website,

and a state-of-the-art message-forwarding system, which allows
her to quickly respond to phone calls when she is out of her
office. All of her materials emphasize that her business is incorporated. As a result, large businesses looking to work with people
who will fit in to a corporate environment and worried about
the legal liability that can come with hiring unincorporated
freelancers (the IRS may later treat them as employees, with
resulting legal hassles and penalties) are far more comfortable
hiring Molly than her more casual competitors.
Better marketing. Jan and Adam market their business, Fresh
Start Plumbing, primarily through the use of highly distinctive
and beautifully maintained 1950s-style trucks painted a deep red
with black fenders and gold lettering. Mounted on top of each
trucks cab is a bronze plunger with a small white light built into
the handle. Wherever Fresh Starts beautiful old trucks go, people
notice and, as they do, many read the slogan on the side: A
good job starts with a good attitude.
Deeper experience. The partners in a small architectural firm,
BT Associates, tire of competing with dozens of other firms for
residential and small commercial jobs. To learn about a hot new
field, they volunteer to design, at no cost, an emergency response
center for their county. When the center wins several design
prizes, BT Associates is quickly able to parlay its experience into
a leadership role in this specialized field. Almost immediately
they begin to land a substantial percentage of the jobs they bid
on. And even when a local firm can use its political connections
to beat them out, it often contracts with BT Associates for behindthe-scenes design help.
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What Makes Your Business Special?

What do you know, or what can you learn or do, that will give you a
clear and valuable edge in your marketplace? And just as important, how
easily could someone else copy it? If the answer is easily, the fact that
your business has an edge over its competitors wont be worth much in
the long term unless, of course, you are able to continue to make the
innovative changes needed to stay ahead. (See Chapter 6, Innovate Now
and Forever.)
Example:
Julia owns The Top Slice Sandwich Shop in a busy downtown
location in a small Midwestern city. On a summer vacation to Los
Angeles, she spots a new food trenda cross between a taco and
a crepe, called a craco. Believing that she has seen the future,
and convinced the craco could be her ticket to prosperity, Julia
rushes home and updates her menu. Yowser! Cracos fly out the
door as fast as she can make them, and Julia has her most profitable quarter ever. Then reality hits. Julias three main competitors,
Bills Coffee Shop, Noreens Bakery, and Sandwich-A-Go-Go, fight
back by introducing their own versions of the craco. Even more
annoying, Bill and Noreen underprice Julia. With her competitive
advantage gone as fast as it arrived, Julias sales and profits fall
back to their normal meager levels.
Fortunately, not all knowledge can be copied as easily as a
sandwich recipe. Suppose, instead of staking her future on
flogging a fad sandwich, Julia decides to turn her run-of-Main-Street
sandwich shop into a high-quality soup, salad, and sandwich bar
serving super-fresh baked goods and hearty soups made from
fresh organic ingredients. To pull this off, Julia first needs to find
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growers and wholesalers who can supply her with organic produce
daily. Once she creates this network, Julia must then install the
equipment and master the cooking skills and management systems
necessary to cost-effectively and consistently produce a changing
array of top-quality food.
Assuming her new health-conscious, high-quality format attracts
plenty of customers, Julia will now find it far easier to charge premium prices and defend her market niche. To compete effectively,
her competitors will have to similarly reengineer their businesses,
something that will take a lot more planning, effort, and investment
than copying a trendy sandwich. And even if a competitor moves
to open a similar operation, Julia should have ample time to
further improve her business.
You may already know things that could make your business hard to
beat. Take my friends Will and Cara, who for a number of years imported
womens casual clothing from India under the name Radiant Imports.
Using contemporary designs created in the U.S., this husband-and-wife
team contracted to have Radiants clothing line sewn in Madras, using
Indian fabrics. Then, principally by taking orders at trade shows, Will and
Cara sold their creations to retail clothing shops throughout the U.S.
Although Radiant enjoyed a number of modestly profitable years, the fact
that it had to compete with a swarm of similar importers meant that Wills
and Caras business was brutally price-competitive, making it difficult to
really prosper. In addition, the fact that there were a number of similar
suppliers made it tough for Radiant to collect from many underfunded
boutiques; when Will and Cara stopped extending credit to a shop, it
could simply order from others. What all this added up to was that despite
Will and Caras excellent designs, hard work, and exhausting travel
schedule, Radiant simply couldnt sufficiently separate itself from its
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competitors. At the end of the day, they were just one more lookalike
importer of contemporary Indian clothing.
Understanding that they needed to get out of the low-profit, highvolume end of the rag trade, Will and Cara decided to look for a more
profitable and less volatile niche. After researching a number of possible
new directions, they decided to make the most of their deep knowledge
of how and where handloomed Indian fabrics were made. They started a
business in high-end upholstery fabrichandmade, hand-dyed, highpriced cloth, bought in relatively small quantities by decorators and small
custom upholstery shops serving an affluent clientele. Armed with fashionable Western designs, Will and Cara put together a network of skilled
handweavers and dyers in several remote Indian villages they already
knew well. Then, using familiar marketing techniques, such as displaying
their wares at high-end trade shows and in upmarket upholstery fabric
catalogs (as well as other creative strategies Ive agreed not to mention),
Will and Cara developed a network of upholstery shops and designers in
the U.S. and Europe willing to pay well for a unique product. Over just a
few years, Will and Cara, who called their new business Pushkar Designs,
were able to translate their superior knowledge of how to create and
market high-quality handmade upholstery fabric into a business that was
simultaneously more creative, more stable, and more profitable than
Radiant had ever been. Although several competitors tried to copy
Pushkars formula, few were willing to invest the time and care necessary
to create and maintain a similar loyal network of highly skilled villagebased handweavers. And crucially, the two that tried didnt last long, as
they were never able to match Pushkars proprietary system of quickly
ramping up production of each seasons most popular designs.
Building superior knowledge into your business is particularly important if you provide services that can be purchased from many others, such
as house painting, financial planning, bill collecting, or childrens dentistry.
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Unless you can convince customers to highly value your services, youre
in danger of having to compete only on price, something that is likely to
consign you to the familiar small business treadmill of hard work for low
profits. In the traditional professions, such as law, medicine, accounting,
and engineering, licenses and degrees used to be proxies for knowledge
for example, patients were willing to pay well for the services of a doctor
who graduated from a good medical school and had privileges at a
prestigious hospital. Today, with a surplus of general practice providers in
most professions, coupled with the price-depressing market clout of thirdparty payers such as insurance companies, it is far tougher to prosper. No
matter what your profession or occupationbe it architecture, pediatrics,
or teaching dog obedienceyoull normally find that the key to consistent
profits is to go beyond the basic occupational activity and develop a
specialty that customers will pay a premium for. Thus surgeons who
specialize in difficult cardiac cases, lawyers with expertise in intellectual
property, and architects who know how to design extra-secure terrorist
resistant buildings are almost sure to do better in the years ahead than
peers who dont specialize.
Example:
Tina paints houses. So do dozens of other local contractors.
Because she realizes early on that shell never prosper if she gets
all of her jobs based on the lowest bid, Tina sets out to design a
service people will pay a little extra for. Deciding that her skill
with color is a competitive edge, Tina targets customers who want
their houses to look distinctive. As part of getting her color is
cool message across, Tina calls her business Color by Tina. More
important, before she bids on a job, Tina insists on spending an
hour talking color with each potential customer. This includes
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showing them a short video of other houses she has painted,

looking at photos of houses with distinctive color schemes, and
then creating a color mock-up showing what the customers house
would look like painted in various combinations. Tina waits to
talk price until the customer has decided on the perfect color
scheme. Typically, by this time the homeowner is enthusiastic
about the project and impressed with Tina, meaning that she has
a good chance to get the job without having to match the price of
every lowball competitor.
In thinking about how to design an authentic knowledge edge into
your business, its important to realize that you are dealing with at least
several moving targets. Not only do markets themselves constantly change
and evolve, but a local or industry-specific edge that is extremely valuable
one day can become almost worthless the next. Take the experience of
Juan Sanchez, an immigrant from Mexico who arrived in the U.S. with
little more than the clothes on his back. After a couple years of cutting
lawns and cleaning houses, Juan decided to start a housecleaning service
called Sparkle. Instead of pushing a broom himself, Juan organized small
crews of workers whom he dispatched to customers houses for a fast but
thorough weekly cleaning. Juan not only hired and paid the cleaners, but
made sure their Social Security and other benefit payments were made. In
the 1990s, when the IRS began very publicly cracking down on prominent
people who had neglected to make Social Security payments for their
nannies and maids, Sparkles assurance of legality proved to be a huge
business edge. As a result, customers were willing to pay Sparkle a premium. And because Sparkles service was as good as it was legally bulletproof, many remained loyal year after year, meaning that Sparkles marketing
costs were modest.
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But as the new century began to unwind, several of the people who
worked for Sparkle figured out how to emulate Juans system. And when
they did, it proved fairly easy for them to poach customers whose homes
they, after all, already cleaned. Juan recruited more cleaners and customers,
but found himself having to run faster just to stay even.
In short, Juans edge, based on his ability to assure customers that
Sparkles workers were fully legal, was fast eroding. To give his customers
a reason to stick with him over the long term and not defect to lower-fee
competitors, Juan saw he needed to develop a new competitive edge.
Reflecting on the fact that over the years he had often been asked if his
employees could help customers with the many chores that go with putting
on a party, Juan introduced a party setup and cleanup service. Positioning
his new business midway between a high-cost traditional caterer and a
janitorial service, Juans allowed his customers to choose from a long list
of helpful party services. These included preparty cleaning, renting and
setting up tables, chairs, and other party equipment, as well as helping
decorate a yard, patio, or inside space. In addition, Sparkle was equipped
to provide coolers full of ice and beverages, serve drinks, provide Mexicanstyle hors doeuvres, and even do simple barbecue cooking. And best of
all, almost before the party was over, Sparkle would make the mess
disappear.
Sparkles new, reasonably priced party service was an immediate
success with Juans cleaning customers. To drum up more business, Juan
mailed flyers describing his new enterprise to Sparkles roster of former
cleaning customers. Almost immediately a number called him. And several,
admitting that their new housecleaners were not reliable, rehired Sparkle
to clean their houses. Able to charge higher rates for party work than he
could for cleaning houses (people are in a good mood when its celebration
time), Juan was able to raise the pay of his employees, thus cutting down
on turnover. But best of all, party work gave Juan a great chance to
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unobtrusively, but nevertheless determinedly, showcase his new service to

everyone who attended the party, providing a steady stream of new
customers. For example, all Juans employees wore neat black shirts and
jackets with the bright red logo We Make It Sparkle on the back.
You may wonder why, if the party business was more fun and
produced a better profit, Juan hung onto the cleaning enterprise. Good
question. Being a conservative man by nature, his first thought was to
keep the cleaning business both to provide stable cash flow during the
months when people entertain less as well as to find customers for the
party business. But, as the party business continued to prosper and Juan
got more and more calls from people who didnt even know he cleaned
houses, he considered selling the cleaning service to his nephew and
putting all his considerable energy into growing his more profitable new
service.
However, before making the big change, Juan asked himself whether
or not his party business was really positioned well enough to grow and
prosper over the long term. After all, others, including his own employees,
could form copycat businesses. But realizing that because there is a broad
and deep consumer demand for help staging parties, Juan concluded that
he could proceed by providing a consistent level of excellent service
while regularly adding new and improved services types of party assistance.
Accordingly, Juan decided to commit to his new enterprise full time.
Keeping Ahead of the Competition

Although some competitive edges will help insulate a business from
competitive pressure longer than others, none will last forever. If your
bookstore does a huge business each December, in part because it is the
only one in town smart enough to provide free gift-wrapping, your edge
is obviously extremely fragile.
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Or look at Happy Feet, a store that seeks out and sells the most
comfortable shoes on the market to an ever-increasing market of healthconscious middle-aged customers. The company puts great effort into
building close relationships with local podiatrists, and clearly has a hard-tocopy market edge, certainly one that is more solid than that of the fashionchasing shoe boutique next door. But sooner or later, competitors will
find ways to poach Happy Feets comfort-seeking customers, perhaps by
undercutting its prices or offering a bigger selection or a more convenient
location. To stay successful over many years, this means that Happy Feet,
like all small businesses, will have to regularly deepen and broaden how
it meets its customers needs. Happy Feet might do this by broadening its
selectionperhaps by importing walking shoes from other parts of the
world. Another approach might be to create a store within a store to
showcase reasonably comfortable shoes that dont look like grandmas
galoshes. Some customers, at least, will want to include in their wardrobe
at least a couple of pairs of shoes with a little style.
To stay profitable, Nolo has had to repeatedly figure out new ways
to meet its customers needs, and weve used a series of knowledge edges
to help us succeed over the years. But before I tell you about a few of
them, I have a confession to make. Like too many other businesspeople, I
have sometimes assumed that because a particular way of doing business
worked well for several years, it would continue to do so indefinitely.
Wrong.
In the early 1970s, when Nolo was founded, the very concept of
handling legal matters without a lawyer was radical or, if you prefer, deviant.
Still, Nolos first books, How to Do Your Own Divorce in California, by
Charles Sherman, and The California Tenants Handbook (now California
Tenants Rights), by Sherman, Myron Moskovitz, and myself, sold well.
Fortunately for us, established publishers avoided the self-help law field,
apparently reasoning that it made no sense to risk pissing off a famously
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litigious profession to publish books in an unproven market niche. Blessedly

free of serious competitors, Nolo simply had to create and distribute
quality self-help law information in order to build a loyal customer base
delighted to have an alternative to hiring an expensive lawyer.
But as the years went by and Nolo successfully fought off the attacks
of attorney groups attempting to suppress its publications, publishing
self-help law materials became less risky. As a result, dozens of other
publishersfrom tiny start-ups to industry heavyweights with deep pockets
and excellent distribution networksentered the field. Many Nolo
customers recognized that our carefully crafted, scrupulously updated
materials were the best available, but people who had never heard of us
were all too likely to purchase a competitors book, especially if it cost a
few dollars less and had a flashier cover.
As Nolos original edge as the pioneer provider of self-help legal
information lost traction, profits began to fall and we realized that to
survive and grow Nolo badly needed to develop and exploit new knowledge. Starting in the mid 1980s, we accomplished this by pioneering the
development of reliable, easy-to-use consumer legal software, including
WillMaker, a program that allows users to quickly and safely make a will.
Again, for a few giddy years, our new skill propelled us quickly and
profitably forward. As one observer remarked during those times, it was a
little like Nolo had invented a cure for the common cold. But, of course,
no one keeps a corner on a highly desirable product for long. Our success
with WillMaker promptly attracted a number of imitators, and our original
gravity-defying profit margins began to fall to Earth.
And so again, predictably, Nolo needed to become smarter. This time,
instead of just trying to introduce blockbuster new products (of course,
like all publishers, we love a hot seller), we decided to fundamentally
change how Nolo operated. Instead of continuing to follow our old
approach, which can best be described as one-legal-problem-equals-one-
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Nolo-product, we switched to a database publishing model. Using this

new approach to produce a series of books and software programs for
landlords and tenants, Nolo junked its old approach of signing up several
different authors and expecting each to do duplicative research to produce
their particular title. Instead we created an in-house database of landlordtenant law for all 50 states, and had Nolo editors use it to create half a
dozen publications in house.
Although moving to a database publishing model may not seem to
be a particularly radical idea, it was truly innovative when compared to
the customary trade paperback publishing practices followed by Nolos
competitors. Most conventional trade publishers produced their self-help
law books in much the same hit-or-miss way they produced the rest of
their large-format trade paperback titles. They simply had an acquisitions
editor, often with no legal training, commission lawyer-authors who had
little or no experience in writing plain-English books for legal self-helpers.
The typical result was a poorly organized, jargon-filled book that provided
little more than an overview of a particular legal topic before recommending the reader hire a lawyer. And because no data collection system was
in place, the publishers next books in the same legal niche were no
better. In contrast, Nolo, by adopting a superior system of collecting and
storing key information about the law, could more efficiently publish a
series of superior products. Thus our detailed 50-state legal information
about a landlords responsibility to return a tenants security deposit could
be used in half a dozen books and software packages designed for landlords or tenants.
But again, as Ive emphasized, no sooner does developing key new
knowledge provide a business with a competitive advantage than its value
begins to slip. Nolo was poorly prepared when in the late 1990s, a big
chunk of its knowledge edge was suddenly subject to aggressive attack by
a gaggle of well-funded Internet sites, which promised instant access to
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free online consumer law information. As is true whenever any industry

goes through a paradigm shift, Nolo had to quickly come to terms with
the fact that its ability to produce superior print and software products
was sure to become less valuable. To succeed in this new digital world,
Nolo had to learn to leverage its large, plain-English legal database and
create an easy-to-use website where consumers and small business owners could quickly find free, top-quality legal information and download or
order our products at a reasonable price. Doing this meant Nolo had to
rapidly change its deliberate publishing style to fit a speeded-up electronic
marketplaceno easy task.
As Nolo hired programmers and Web designers and purchased a
bewildering array of Internet-related hardware and software, it also had to
dust off the best of its old knowledge. For example, Nolos years of
experience at defeating the legal professions claims that publishing legal
information was tantamount to practicing law without a license suddenly
became newly valuable as bar associations studied ways to attack legal
websites. Similarly, Nolos understanding of how to efficiently keep our
products up to date served us well on the Internet, where customers
expected information to be updated almost constantly.
But, as if to prove the rule that competition often comes from unexpected places, as this book goes to press, Nolo is faced with a surprising
new competitive development. Just as many of the venture-capital-backed
sites that had so recently threatened to bury Nolo lost their funding and
closed down, many federal and state agencies and courts have begun to
provide free online legal information to the public. Weve advocated just
this sort of consumer legal access for almost 35 yearsbut that doesnt
change the fact that we will again need to change our business to adjust
to this welcome new development.
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6
Innovate Now and Forever
Even if youre on the right track, youll get run over if

you just sit there.
Will Rogers
ook at a ten-year-old snapshot of Main Street in any American

city or town and compare it to what you see today. Ill bet that
many of the old businesses no longer exist and that most of the
ones still there have expanded or updated their look. Probably just a few
survivors still look much the same. Look again in another few years and
most of the ones that didnt change will be missing. Downtown retail areas
arent the only business centers subject to relentless change. The same
sort of winnowing will occur on the little white type of the directory
board in the lobby of any office building.
Where are the missing businesses? A few will have moved to new
locations, but the majority will simply be kaput. Its not surprising when
you realize that by most estimates, 80% of business start-ups dont reach
their fifth birthday. One big reason why many enterprises stagnate or even
flatline can be summed up in this way: lack of innovation. Enterprises that
build creative change into their very structure are far more likely to do well
than those that look for a recipe for success and then hope to endlessly
repeat it. And this, of course, is yet another reason why most paint-by-thenumbers franchise formulas quickly look as dated as your average Burger
King.
The reason innovation is crucial to long-term success is simple: To
establish and maintain a robust profit margin, you need to establish a true
competitive advantage. (See Chapter 5, Get and Keep a Competitive Edge,
for more on why this is true.) And assuming you are smart or lucky enough
to accomplish this, you must keep your edge in the face of competitors
who will inevitably try to copy it and customers whose thirst for the new
and trendy seems almost endless. For example, if you establish a small
graphic design business to help local businesses lay out advertising copy,
youll be competing with dozens if not hundreds of others who do much
the same thing. And all of you will be selling your services to business
customers, most of whom are price-sensitive, tight-fisted, and looking to
hop onto the latest design trend. This means that to charge the premium
prices youll need in order to do well, youll have to provide design work
to your customers thats clearly more desirable than they can buy down
the street (or increasingly over the Web). For example, if one year you are
the first local graphics shop to offer a library of popular art deco design
elements, chances are your competitorswho, after all, are similarly
struggling to make a decent profit, will quickly offer similar motifs. To
keep your edge, youll need to be ready with fresh work, perhaps by
turning to the creative design motifs of vintage appliances, including
toasters, coffee pots, and stoves. Or maybe youll seek inspiration in the
wonderful world of 18th century Japanese art. Either way, one big key to
economic success will be to almost maniacally innovate.
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INNOVATE NOW AND FOREVER
So when you consider starting a new venture or reconfiguring an

existing one, think about not only whether your entrepreneurial edge is
substantial enough to set you apart from the competition, but also about
how you will be able to extend your advantage over time. To do this,
youll almost always have to build the determination to continuously
innovate into your business culture from the start. If you dont, its all too
likely youll develop the complacent habits that relegate so many oncepromising businesses to the treadmill of hard work for little profit.
In my experience, innovation in the small business world occurs in
three ways: invention, copying, and serendipity. Lets examine each to see
how it might help your business.
Avoid Fad Businesses

Loads of entrepreneurs believe that the sure way to success is to spot a
trendy business early, jump on it, and ride it to riches. In fact, some trust in
this approach so firmly that they refuse to let repeated failure stand in the
way of trying it again and again. Think of popcorn. During my lifetime Ive
seen dozens of popcorn-based businesses come and go, many of them in
tourist or amusement districts, but a fair number at other locations as
well. Ive purchased popcorn covered with caramel, seasoned salt, cheese,
garlic, powdered sugar, maple sugar, and even jalapeno peppers. Besides the
manufacturers of the popping equipment and the owners of movie theaters,
someone must have made money in the popcorn business. But compared
to the number of people whose entrepreneurial dreams were crushed, the
percentage is tiny.
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There are at least three big reasons why trying to latch on to a fad
business idea is likely to result in abysmal failure. First and most fundamental,
by the time you spot the cant miss opportunity, more experienced
businesspeople savvy enough to be ahead of the curve will be cashing out.
A second big reason to avoid fad businesses is that because they
usually are simple to run, they are easy to copy. Almost as soon as croissants
or fruit smoothies became popular, a thousand bakeries and juice bars
began to serve them. As a customer, you probably barely notice when
another opens or closes in your area. Why should you? Because these
businesses are all much the same, there is little reason for you or any
other customer to develop loyalty to any of them.
Third, because fad businesses tempt entrepreneurs to enter fields
they care little about, they violate a fundamental rule of small business
success: that you be interested in your business. (See Chapter 2, Choose a
Business You Care About.) The result is that after a year or two, the
chances that youll become bored or burned out go way up.
Even if a red-hot new business looks to be enduring, it usually doesnt
make sense to plunge in. Thats because a truly huge change in the business
firmament is sure to attract big competitors. A good example is the video
rental business, where the rapid expansion of Blockbuster and other huge
outfits in the 1980s and 90s quickly killed tens of thousands of mom-andpop shops. Most small operators failed not because renting videos was last
years fad, but precisely because video rentals turned out to be a huge and
lasting business. Much the same thing happened with while-you-wait oil
changing and designer coffee boutiques. In short, unless you can locate a
good location far away from the price-cutting chains (no easy trick), or
develop some other clear entrepreneurial edge, big operators will almost
surely use their economies of scale to drain most of the profit out of
these hot businesses.
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Paradoxically, rather than trying to win the race to the next big thing,
it can often make more sense to look at business fields that were red-hot
a decade ago. You might even find a field where so many underfunded
businesses have folded that there is actually an opportunity for the survivors.
Assuming it suits your personality and interests, you might be able to
cheaply move in just in time to catch a second wave.
Invention
Its hardly a secret that Americans love new things. From digital camcorders
and camera phones to MP3 players and programmable DVDs, much of
our time is spent using tools and toys that didnt exist a generation or two
ago. Its not only big inventions, however, that change lives and make
fortunes. Think about the equipment in todays dental offices and compare
it to what was in use a decade ago. Virtually every piece has been substantially improved or changed. Many of these state-of-the-art tools were
thought up by dentists themselves who apparently thought it was more
fun to invent things than fill another bicuspid.
Similarly, many of the services we now take for granted are either
relatively new or are packaged or delivered in innovative ways. For example,
most small businesses now outsource payroll preparation, equipment
maintenance, graphic design, and many other tasks to automated specialists
whose work is better, cheaper, and faster than that done in-house. Similarly,
21st-century electricians, plumbers, contractors, and most other service
providers use many tools and techniques that didnt exist in Ronald Reagans
America. For example, a generation or two ago, hiring a housepainter
usually meant living through a month of having a couple of men hang off
heavy wooden ladders while swabbing away with short-handled brushes.
Today the combination of lightweight ladders and scaffolding, power
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sanding and other efficient prep equipment, and better, faster ways to
apply paint means the same job can be done in less than a week.
When new goods and services are introduced or old ones are improved,
someone always profits from the attendant jump in productivity. The U.S.
government hands out over 20,000 patents to independent inventors each
year, a number dwarfed by the huge number of non-patentable but nevertheless significant innovations. Occasionally, an inventor is clever enough
to both create and capitalize on a valuable breakthrough. But at least as
often, much of the profit falls to others who use or market the unique
product, service, or business method. For example, when easy-to-customize
modular storage systems were first developed to organize closets and
garages, interior designers who quickly understood and embraced these
exciting new tools could charge hefty fees to customers determined to
improve on closet designs that had changed little for several centuries.
I have little useful to say about the pure process of invention. Like art
or poetry, eureka breakthroughs either occur or they dontthere is little
most of us can do to turn ourselves into an Edison, Bell, or Shockley. But
fortunately, to prosper in the small business world, you dont have to invent the light bulb, telephone, or transistor switch. In fact, most profitable
innovations consist of combining or connecting two or more fairly mundane things. For example, in the 1990s a tiny website dedicated to buying
and selling classic Pez dispensers figured out how to combine the fun of a
local swap meet or garage sale with the global connectivity of the Internet.
The result, of course, was eBay, now one of the worlds most valuable
corporations. Similarly, Amazon.com rode its patents on the simple but
powerful concept of One-Click Shopping to create a hugely successful
business selling a wide variety of new merchandise.
But its not just large enterprises that profit by deploying existing
knowledge in new ways. In your own neighborhood, many service
businesses have very profitably found ways to provide traditional services
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in ways so efficient and attractive that their customers patronize them even
though they charge a premium compared to many of their competitors.
For example, near me, several opticians and eyeglass shops now work
together, so in one stop you can have your eyes checked, order new
glasses or contacts, and have them ready in 24 hours, something that was
impossible just a few years ago. And an estate planning lawyer has given
up her traditional office-based practice and switched to making house
calls, an old-fashioned service her clients, many of whom are elderly,
nevertheless regard as being highly innovative.
Often, the ability to look at familiar information in new ways is all
the entrepreneurial insight needed to blaze a new and profitable small
business path. When Ed Sherman and I started Nolo, we realized many
millions of low- and middle-income Americans couldnt afford to hire
high-priced lawyers to handle routine legal matters. We also saw that the
few self-help law products then on the market were very poor. Putting
this information together, we began creating a library of high-quality,
plain-English legal materials that would allow ordinary people to safely
and affordably take the law into their own hands.
Many new enterprises start when someone gets mad at how traditional enterprises operate and decides there must be a better way. This may
be as simple as becoming disgusted with the quality of the coffee local
restaurants provide and figuring how to serve a tastier brew. As you sip your
morning latte at Starbucks, Peets, or an independently owned purveyor of
excellent coffee, it may seem like this hugely profitable innovation was a
no-brainer. Not so. If you are old enough to remember how bad most
American coffee tasted 30 years ago, youll understand just how much
insight and determination was necessary to create businesses that really
can serve a great cup. And, of course, there are many other fields where
dissatisfaction with the status quo was the fuel that drove innovation. For
example, I patronize a shop that sells beautifully designed, handcrafted tile
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that got started in large part because its owners were frustrated with the
unimaginative selection available at local building supply outfits.
Example:
Jill wanted to quit her job at ABC Travel and open her own travel
agency. But airlines were cutting travel agent fees, and people
were increasingly booking domestic air travel through discount
websites. Realizing the last thing her city needed was one more
struggling air travel booking agent, Jill decided she needed to do
something different. As part of her planning process, she polled a
group of affluent people who traveled frequently about the places
they most wanted to visit. When she collected their answers, she
saw that several destinations, principally in Europe, stood out.
Deciding to call her business All About England and France, she
focused on travelers visiting these two countries. Jills new business
quickly developed a reputation as being the most knowledgeable
in her metropolitan area about travel to these places, and she
quickly achieved a very solid profit margin booking a high volume
of upscale tours and other vacation packages.
But within 18 months, several other travel agents began
copying Jills formula. Fortunately, anticipating this development,
Jill had already improved her services. One way she did this was
to ask her clients what they were most interested in doing, learning
about, or participating in on their vacations. Seeing that bicycling,
gardening, golf, and cooking were high on the list, Jill developed
a number of preplanned itineraries emphasizing these activities.
For example, working with English and French bicycle rental and
touring companies, Jill was able to offer customers a dozen
guided or self-guided tours complete with reservations at lively
wayside inns and suggestions for places to eat and visit.
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Copying
In big-business doublespeak, copying the ideas of other businesses is
called benchmarking, something that all major corporations routinely
practice. For example, the owners of virtually every large entertainment
and sports complex in America have for decades sent managers to Disney
World to look for people-handling practices they can beg, borrow, or
benchmark. Because most of Disneys business practices are right out in
the open, learning from and even copying them is not only smart and
cheap but, as long as competitors dont try to borrow the Mouse, Duck, or
other copyrighted or patented characters or inventions, perfectly legal.
And it should come as little surprise that Disney itself has borrowed
innovative ideas from many other entertainment venues.
Copying, borrowing, or, if you prefer to be blunt, stealing is a particularly great way to innovate in the world of small business. America is a
big place, and in many fields there are so many small operations that it
can take years for best practices to permeate a whole business segment.
For example, if you run a childrens clothing store in Omaha, you may be
able to check out a dozen similar operations in California and perfectly
legally come away with several innovative business ideas no one in Nebraska
has yet tumbled to. Similarly, if you own several bagel shops in Seattle,
you would be nuts not to check out the New York bagel scene when
visiting the East Coast. And if you picked up a couple of good ideas, you
would really be meshugeh if you didnt quickly adopt them.
Copying the best practices of others should be a part of every new
and established businesss plan. Since its free and easy, you may already
do it on an informal basis. But to improve your chances of success, I
advocate a disciplined approach of systematically studying the operations
of excellent businesses in your field, particularly those that are not in your
immediate area. Staying away from local competitors will not only avoid
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unnecessarily angering them (see Chapter 14, Embrace Your Best

Competitors), but will also lessen the risk that youll find yourself defending a lawsuit based on the claim you stole trade secrets. To locate
businesses good enough to serve as role models, talk to suppliers and
other knowledgeable people who work in a different geographical area.
For example, if you plan to start a small ad agency in Bangor, Maine, you
might call several business acquaintances who use similar agencies in the
mid-Atlantic states. Ask them for the names of three excellent local ad
shops in their area. If they cant help, maybe they know someone who
can. Once you get a preliminary list, do some more checking (looking at
websites often tells you a lot) to shorten it to a few successful businesses
that are most like yours.
At this point, youll need to decide whether it makes more sense to
call the other business, explain what you are doing, and ask for help, or
to anonymously study their operations. Depending on a number of factors,
including whether you can arrange an introduction and how transparent
the business is, either approach can work. For instance, its surely a lot
easier to learn a lot about a deli by walking in the front door a few times
than it is to figure out what makes an ad agency tick by schmoozing with
the receptionist.
Establish a separate notebook or computer file for every business
you study, dedicating a section for each key business area. Depending on
the field you are studying, this might include signage, marketing, staffing,
website design, key products, and delivery methods. For example, if a
business you study apparently gets lots of calls because of a super-clever
Yellow Pages ad, you want to capture that information in your notebook
so that when you return home, you can design an equally compelling ad.
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Example:
Maureen has spent several years working as an electrician in a
medium-sized midwestern city and recently passed the state
electrical contractors exam. Excited by the aesthetic and energysaving possibilities of new lighting systems, Maureen dreams of
opening a lighting store combined with a traditional electricians
business. Her idea is to give remodelers a one-stop way to buy
new lighting systems and get them installed. Although in her city
there are plenty of both lighting retailers and electricians, no
business efficiently combines the two, in large part because lighting stores are afraid to offend electricians, who are a major source
of customer referrals.
Maureen is convinced that customers will be enthusiastic about
a one-stop operation. Although she concedes that her approach
may alienate some independent electricians, who will send customers
elsewhere, Maureen reasons she will gain far more than she loses
by funneling lighting purchasers directly into her own installation
business. And shes sure that once she provides these customers
with quality electrical service, they will be likely to call her when
they have future electrical needs.
Maureen enlists her Uncle Jimmy, who retired early with a
big nest egg, as an investor. Although Jimmy is impressed with
Maureens reasoning, he has one big concern: Maureen cant point
to any successful area businesses like the one she proposes. The
positive side of this is that Maureens business is fresh and innovative. However, Jimmy worries that since Maureen wont be able to
learn from the good and bad practices of others, shell likely make
costly mistakes. Telling Maureen that Ecclesiastes had it right when
he wrote, There is no new thing under the sun, Jimmy gets on
the phone and starts calling lamp manufacturers and wholesalers
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who do business across the country. Where, he asks, is there a

business like the one Maureen proposes? He receives the names
of a number of local lighting companies that are more or less
similar to what Maureen envisions. Narrowing this list to three, all
in other states, Maureen and Jimmy decide to take a few days to
study each in depth. After two weeks of travel, considerable
detective work, and meetings with several surprisingly friendly
small business owners, Maureen and Jimmy return with several
notebooks full of exciting information. They are convinced not
only that Maureens idea can succeed, but also that they now
know exactly how to accomplish it.
Serendipity
Way back in the 1950s, in his groundbreaking book Innovation and
Entrepreneurship (Harper Business), legendary business thinker Peter
Drucker pointed out that many profitable innovations result from accidental
or unexpected breakthroughs. He meant the kind of thing that occurs
when you set out to develop a better variety of easy-to-remove packaging
tape and end up inventing a revolutionary wallpaper that both sticks tight
and is easy to peel off the moment you are sick of it. Whats so special
about Druckers insight? After all, from the discoveries of penicillin and
saccharin to the inventions of nylon and Velcro, its obvious that chance
plays a significant role in finding new ways to do things. Drucker really
gets interesting with a second and more telling point: When businesses
stumble on a new product or service, even one that could give them a
significant competitive advantage, they often either fail to recognize it or
even actively suppress it. That is, they keep fooling around with the tape
and stick the wallpaper in the trash.
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Example:
Leo Rac and Stan Frax are longtime partners in the Racafrax Glass
Co., a nothing-special local glass supplier. It sells hundreds of
types of glass to contractors for use in residential and small commercial construction projects, and also caters to do-it-yourselfers.
A few years ago, Racafrax began to get more and more requests
for several types of plastic, particularly for newer, unbreakable
burglar-deterring types that could be substituted for window glass.
At first, Racafrax sent these people elsewhere. Finally, after turning away more and more business, Leo and Stan began stocking a
few of the most commonly requested types of window plastic,
keeping them in an unused area behind the stairs they not-soprivately referred to as the Plastic Hole.
When plastic sales immediately turned out to be solidly
profitable, helping Racafrax to have its best ever year, Leo and
Stan were delighted that they finally had the financial wherewithal
to expand and improve their facility. They bought and remodeled
the next-door warehousesomething that allowed them to more
than double their selection of glass. Despite their huge increase in
floor space, they left the Plastic Hole in its same dingy spot.
Were Leo and Stan dumb? No question. Unfortunately, they were
also typical. Like most business owners, they were slow to recognize and
even slower to embrace an accidental business breakthrough, especially
since doing so would have meant fundamentally changing their original
formula.
Sadly, this head-in-the-sand approach often doesnt change even if
the innovative business approach is more profitable than the original
business. Drucker beautifully illustrates this point with a story of how
after World War II, Macys used huge profits from its suddenly red-hot
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sales of stoves, dishwashers, and other appliances to expand its lowerprofit clothing business instead of its appliance department. And when this
didnt work to restore clothing to its traditional three-fifths of Macys sales,
the company actually tried to push appliance sales down. The result was
that aggressive competitors who understood that new affluent Americans
were ready to fill their new suburban houses with appliances stepped in
and captured the entire business.
Think about a half-dozen small enterprises you patronize. When was
the last time your drycleaner, plant nursery, or beauty salon significantly
changed the way it does business? If the answer is somewhere between
rarely and never, you can safely bet that the business is guilty of
ignoring and probably even suppressing new information, and as a result
is in at least the early stages of decline. In a world where change is an
ever-present fact of business life, a more nimble competitor will surely
appear and quickly grab market share. On the other hand, if a successful
business you know has recently made positive changes to the way it looks,
what it sells, or how it interacts with its customers, chances are its owner
has learned to efficiently gather the innovative information necessary to
build on the companys competitive edge.
In the big business world, innovation is often the product of many
years of expensive research, as is obviously true for new drugs, computer
chips, and jet engines. Fortunately, the information necessary to innovate
in the small business world is usually far more available. Indeed, for the
business owner with an open mind, good ideas that can be implemented
at a reasonable cost are everywhere available. Unfortunately, as Drucker
points out, too few businesspeople are prepared to recognize and act on
the highly valuable information that is right under their own noses.
Here are several more examples of businesses that are ignoring
information they should be embracing to improve their competitive
position:
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A small-animal veterinarian who frequently gets calls from

concerned pet owners after regular business hours, but cant be
bothered to look into hiring another vet to run an evening clinic.
A certified public accountant specializing in income taxes, who,
despite being asked questions almost daily about planning to
limit estate taxes, never reorganizes the business to provide
customers helpful information and services geared to this topic.
A prepress type shop located on a busy street that doesnt institute
a free pickup and delivery service or otherwise improve access
despite the fact its high-volume customers constantly complain
about parking and ticket hassles.
A consultant who helps city and county governments plan police,
fire, and other public safety buildings, but turns down a number
of requests to help plan newly popular disaster-response centers
because theyre outside her area of expertise.
A haircutting salon in a city that is the destination for many
Southeast Asian immigrants that doesnt seek out haircutters who
speak one or more of the appropriate languages.
A plant nursery which, when its normal fall bulb shipment sells
out in two weeks instead of the normal eight, not only doesnt
reorder, but next year increases bulb inventory by only ten percent.
Poor babies. By not gathering and acting on the information their
customers are all but thrusting upon them, these businessesall of which
have lots of competitorsare turning their backs on ways to improve their
profitability. But before you shed tears for them, take a moment to think
about your own business. Now ask yourself this simple question. Do I
have the innovative mindset to recognize and profit from valuable new
information? If you say yes, quick, what are the three hottest areas of your
business, and what are you doing to take advantage of their popularity?
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Example:
Madge opened a gift shop, Something Special, in a small university city in the Midwest. Selling a wide variety of items, she barely
broke even her first year. Given that Madge was a single mother
with two teenagers to raise, this simply wasnt acceptable. Madge
was about to put up a going-out-of-business sign when a customer
came in and bought almost $1,000 worth of Native American crafts
which were displayed on a couple of shelves at the back of the
store. When the customer asked to be alerted when the next
shipment came in, Madge reflected that sales of Native American
artwork had been profitable and several other people had made
similar requests. In short, after checking to be sure no one else in
her extended area had captured this niche, she decided to put
away her closing sign and convert half of the store to North
American Indian arts and crafts. To make a long story short,
Madges new emphasis, aided by a savvy marketing campaign
featuring programs and workshops hosted by many of the Native
American artists, really worked. So much so that a year later,
Madge renamed her new, prosperous shop Something Tribal, and
dealt exclusively in indigenous arts and crafts.
Another great example of how to improve a business by paying
attention to unexpected information involves the Holiday Inn in
Cumberland, Maryland. As reported by Associated Press writer David
Dishman, for years this motel bore the heavy burden of being built hard
against a railroad line. When the hotel wasnt full, desk clerks, fearing that
guests would be bothered by the 65 noisy trains that clattered past each
day, assigned guests to the quieter rooms closer to the highway. Then one
day a train enthusiast contacted Sales Director Karen Twigg to ask how
much extra it would cost to book a room facing the tracks. Twigg could
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have politely said they were the same price, accommodated the mans
request and gone on with her routine. Instead, she quizzed the caller
about why he wanted to overlook the trains and then, realizing that he
wasnt the worlds only train enthusiast, decided to see whether she could
profit from her new knowledge. She did this by starting a promotional
campaign aimed at train buffs. Make tracks to stay with us, Cumberland
Holiday Inn advertised in train fanciers magazines. This message was a
big hit, and train-loving travelers from all over the world booked track-side
rooms with a view of all those locomotives pulling their loads in and out
of the CSX switching yard and maintenance shops.
One reason Im so familiar with the tendency to suppress accidental
discoveries is because, like most businesspeople, Ive done it. One example
involves Nolos website, which we established in 1994. To attract users
without incurring prohibitive advertising costs, we urged other Internet
sites to use portions of our legal content free in exchange for providing a
link to Nolo.com. Then one day an editor for a prominent website called
asking for permission to place a significant portion of Nolos Online Legal
Encyclopedia on their site without a link back to Nolo. Linking to other
companies is against our policy, he explained. Seeing no benefit, our
marketing rep said no thanks and hung up. Literally a few minutes later,
the editor called back and offered to pay us an annual fee of $25,000 to
use over 100 articles of our self-help law material. As you might expect,
this time we cheerfully said yes.
Because this unexpected revenue had not been budgeted, it was
essentially up for grabs. The marketing director opined that this was a
lucky accident (no one pays for content online) and suggested Nolo
spend it as part of an effort to redesign its book covers. Since this was
long overdue, we did. In the meantime, Nolos Web marketing staff went
about its usual business of trading Nolo content for links to our site. A few
months later, much the same story repeated. Again, Nolo unexpectedly
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got a substantial fee for a content license. And again, Nolo management
concluded this was a fortunate anomaly (we wouldnt have gotten this
money if the other sites negotiators were experienced) and spent the
windfall to improve non-Web-related areas without changing the way
we marketed our online content.
Fortunately, the third time we were offered dollars for content a few
Noloids began asking why, if other businesses were willing to pay for
online content, Nolo didnt actively pursue the business. To cut to the end
of this little drama, licensing Nolo content finally did become a new and
profitable Nolo endeavor. Interestingly, this in turn led Nolo to redesign
its content creation process to create more products our licensees wanted
to buy. Instead of simply publishing books and software in hopes someone would buy them, Nolo began to look for ways to create at least some
of its plain-English legal information to order, thus locking in a profit
before a word was written.
A Case Study in How Good Ideas Surface

Here is an extended example that illustrates how a troubled small business
is likely to suppress the information it needs to survive and how, with
patience, it can find and exploit it. I offer it in the hope that it will inspire
you to take a fresh look at every aspect of your business, even the
humblest. Over and over Ive learned that big ideas can be found in the
oddest places, sometimes even in the parts of a business everyone
associated with it loves to hate.
Example:
Mack, the hardworking owner of Bright Spot, a small plant nursery,
was forced to think about the future of his newish business for the
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most basic of reasons: It was failing. Mack, who had seemingly

been born with a world-class gardening gene, had quit his job as
a psychologist 18 months before to open a small plant nursery in
an outer suburban area where there were already several larger
and well-entrenched competitors. He believed that by specializing
in two very popular plantsroses and Japanese mapleshe
would have the competitive edge needed to prosper.
Unfortunately, it hadnt turned out to be so easy. Despite
bookkeeping help from his wife, Salli, who was a financial planner,
his teenage sons and daughters volunteer summer help, and not
paying himself a salary, Macks business still was in the red. Bright
Spots biggest problem turned out to be its small size. Customers
wanting a larger selection of plants could patronize the two bigger
nurseries, and price-conscious customers preferred to shop at the
garden department of a big box store 15 miles away. Marks seemingly clever insight that Bright Spot could succeed by specializing
in just two hot plant areas turned out to be flawed. In large part
this was because the two larger nurseries immediately responded
to his competitive gambit by installing their own specialty rose
and Japanese maple boutiques. By using profits earned in the rest
of their business, they were also able to steeply discount prices.
To fight back, Mack expanded his selection of other plants and
held frequent sales. Although these strategies brought in customers,
neither contributed a speck of black to Bright Spots bright red
bottom line.
Finally, on Labor Day, when his business was mercifully
closed, Mark convened a meeting of his family and his three key
employees. After handing around his latest lousy financial statement, Mark asked for honest feedback. Could Bright Spot ever
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earn a decent profit? Or should Mark put it out of its misery and
go back to work?
At first no one said a word, each trying to avoid being the
first to say that Bright Spot was simply the wrong business in the
wrong place at the wrong time. Finally, Ed, Marks 15-year-old
son, tried to put a positive spin on things. Dad, I know were not
selling enough plants, but like Ive been telling you, my part of
the business is in great shape. Ive gained ten pounds and can
bench 270.
Ed, you agreed to help carry the heavy stuff to peoples
cars, Mark snapped. I wish you would stop complaining.
Cmon, Dad, I was trying to say something nice. And you
have to admit Ive lugged tons of dirt. Probably 70% of the work
Ive done this summer involves fetching and carrying those heavy
bags of soil.
Curious, Salli asked, Do people really buy that much soil?
Oh, yeah, Mom. Ive ended up spending most of my time as
Dads dirt boy, hauling the stuff to peoples cars.
Why do customers buy so much? Salli asked. Isnt bagged
planting mix mostly used in small outside containers?
Nahpeople who get frustrated trying to break up the
rocky soil around here spread it right on their gardens. Or they
end up digging out the hard stuff and replacing it with new soil
thats easy to work.
Cant people buy bags of soil cheaper at the shopping center?
Salli asked.
A little bit, but remember they have to drive another 15
miles to do it, and on a Saturday morning, who wants to
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Salli interrupted, If thats really true, I suggest you look at

how you can sell more dirt.
When Mark ignored her and began to explain several problems
that were preventing him from making a profit on the roses, Salli
interrupted again. Mark, Im serious. Lets talk about the dirt. Ed,
tell me more about what you have been doing.
Ed explained that in the spring, the nursery had carried only
two types of soil, each in bags piled behind the fertilizer shed to
the side of the small sales building. After dragging the bags all the
way in on delivery day and then right back out the rest of the
week, Ed had begun piling it closer to the front gate. More
customers now spotted the dirt, and sales improved. Then Bright
Spot had begun carrying both finer and coarser grades of soil,
plus some fancy stuff with chicken poop mixed in. Sales went up
again.
Next Salliwho youll remember is a financial planner
asked about the profit margins on the dirt business. It didnt take
her long to figure out that although soil and soil amendments
amounted to only 20% of Bright Spots sales, they were among its
few profitable items. After all, you dont need to water bags of dirt
every day and it never dies on you. Armed with this info, Salli
began a campaign to convince Mark to reorganize the operation
into what she and Ed started calling the family dirt business.
Fortunately, since there was a large fenced area behind the
nursery, this proved fairly easy. After investigation revealed that
no special permits were needed, Mark ordered truckloads of
different types of topsoil and piled it high. Now customers could
buy it in bulk and bag it themselves to save money or, for a few
dollars more, purchase it prebagged. Mark also made a deal with
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Fred, a guy with a small dump truck, to do affordable home

deliveries.
When the new service immediately proved popular, Mark
added various types of bulk mulches and began experimenting
with related product lines, such as ornamental rock and big planters that were a little nicer than those available at the mall. Somewhere along the way he met Mikey, a retired iron worker who
used an acetylene torch to create oversized garden sculptures that
he was happy to have Mark sell on consignment. Although
retailing Mikeys creatures wasnt highly profitable, their presence
turned the dirt yard into a fantastical destination for small children,
pleasing their parents and bringing in more customers.
What about the plants? Mark soon decided he could give up
the unprofitable pretense of being a full-service nursery. Instead
of trying to bring in customers by holding money-losing sales, he
returned to his original idea of concentrating on Japanese maples
and roses, especially varieties not easily available elsewhere.
Although at first Salli counseled that it made no sense to continue
to plow dirt profits into these marginal businesses, this time it was
Mark who turned out to be prescient. Not only did the dirt yard
increase plant sales by bringing in lots of potential customers, but
also before long the larger nurseries realized that Bright Spot
wasnt going to be forced out of business by aggressive priceslashing, and returned prices to normal levels. This gave Mark the
opportunity to raise his prices to a profit-producing level and to
establish Bright Spot as one of the best specialty nurseries in the
area. Within two years, his nursery business was almost as profitable as his dirt yard, and in response to customer requests he
added an immediately profitable line of antique fruit trees.
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Making Innovation a Continuous Process

If the innovative ideas behind your business turn out to be on target, and
your enterprise is otherwise competently run (and sometimes in the short
run, even if it isnt), you will enjoy a period of success. Now your task is
to keep innovation happening, so that competitors cant immediately
catch up to or even leapfrog your new approaches.
Although this sounds easy, it isnt. As the owner of a small business,
you will daily be pulled in many directions. Customers must be satisfied,
employees organized, supplies ordered, and bills paid, to mention just a
few. And in the midst of all this, you must still plan to improve your
business. While at first you might think the biggest problem would be
having time to come up with creative ideas, the opposite is more often
true. For many entrepreneurs, ideas, it turns out, can be as numerous as
pumpkins in October; its picking the best ones and carving them to
perfection thats difficult. And once each is implemented, youll also need
to be able to track its success or failure. Thats because youll never have
time to nurture the best ones if you arent equipped to recognize and
shuck off the losers.
When thinking about how to improve your business, start with three
key principles. First, if your business is already successful, youll want to
improve it incrementally, not fundamentally reinvent it. This way, you
both minimize jeopardizing your success while at the same time take steps
to extend your entrepreneurial edge before it begins to erode. For example,
if yours is a small software company whose profitable specialty is designing database software for lumberyards, it probably doesnt make sense for
you to try and apply your innovative inventory-tracking ideas to retail
stores or other businesses you dont fully understand. Better to focus on
innovative ideas to make your software absolutely essential to your lumber
industry customers. If you do decide to expand, focus on modifying your
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software to meet the needs of closely related businesses you already have
a good feel for.
Second, focus on ideas that can be implemented promptly. In the
small business world, the investment of time or money to get something
going two or more years from now is almost always more than you can
afford. Better to focus on innovations that can be implemented immediately. If you are right, theyll produce income now and in two years. And
if your idea doesnt work, you can quickly scrap it and move on to something else. For example, the owners of the Cumberland Holiday Inn might
conclude that while immediately redesigning their operation to cater to
rail buffs makes great sense, opening more railroad-focused motels does
not.
Third, focus on the real needs of your target market, not on your
own hopes and dreams. When askedand believe me, its always wise to
askcustomers often request the most basic improvements, not clever
breakthroughs. For example, a lawyer, house remodeler, or landscaper
who adopts a policy of returning all phone calls the same day may do
more to please customers and clients than they would if they developed a
laundry list of new services. Similarly, a coffee shop that serves better
grades of coffee and tea may score more points with breakfasters than if it
went to far more trouble to create a whole new menu.
Example:
Madge, the woman who was smart enough to turn her failing gift
shop into a successful purveyor of Native American arts and crafts,
distributed a questionnaire to a number of her best customers
requesting feedback as to how she could better serve them. A
number of responders suggested she not only carry arts and crafts
from North America, but also stock folk art from other parts of the
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world, including Nepal, Tibet, South East Asia, and Central America.
Worrying about spreading herself too thin, Madge nevertheless
decided to expand her inventory to include folk art from all the
Americas. Although doing this involved the cost of renting a small
adjoining space, Madges new initiative was profitable from the
start.
Gather as Many Good Ideas as Possible

To identify ideas that fit these three criteria, I suggest you start by adopting
this principle: Everyone with a stake in your business success should be
involved in the innovation process. Fortunately, since most ideas are free,
it will cost you very little to set up a process to facilitate this. But since
business-changing ideas rarely show up on schedule or in easy-to-recognize
ways, bringing as many as possible to the surface will take both creativity
and stubbornness. For example, if you operate an organic grocery, youll
want an idea-gathering system that encourages the high school kid who
uses a cute little wheelbarrow to load heavy orders into customers cars to
tell you if customers frequently ask where they can buy one. This doesnt
mean youll ultimately decide to sell wheelbarrowsjust that you want to
capture this information.
Here are some suggestions that may help you design an informationgathering system.
Brainstorm
An approach I find particularly useful consists of setting up one or more
brainstorming sessions with people who care about your success. Depending
on whether your business is still in its start-up phase or is well-established,
participants might include investors, family members, and close friends
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with deep business experience, as well as current or prospective employees

and key contractors or suppliers. Most of these people will have ideas to
improve your business. And the great thing about the American tradition
of participatory democracy is that you need only ask to find out what they
are. Of course, some of the suggestions you collect will be wildly impractical, others far too costly, and a fair number just plain kooky, but there
are also likely to be at least a few excellent ones.
Groups of from six to eight or at most ten people work best. Arrange
to get your group together in a quiet place for several hours. To make
sure all participants are well informed about your business, provide in
advance financial projections, marketing information, and other helpful
background materials.
Prepare by placing an easel holding a big pad of white paper at the
front of the room with an important question written at the top using a
dark marker. Something like How can ABC Ventures become more
profitable? works well. Designate as group leader someone who can
write clearly, has a good sense of humor, and is comfortable in front of
people. Its usually best if you dont assume this role, since your presence
at the front of the room may intimidate some participants.
The facilitator, acting as master of ceremonies, should begin by
making it clear all ideas are welcome and that there is no such thing as a
stupid suggestion. Its also a good idea if the facilitator coaches people to
be brief, explaining that the exercise works best if you first collect as
many ideas as possible and then later discuss the most viable ones. For
example, if you plan to open a firewood business, the first person might
say Advertise in the PennySaver, the second Offer summer discounts,
the third Pay salespeople commissions for larger orders, and the fourth
Paint the delivery truck a distinctive color and list all the types of wood
we sell.
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Dont insist people speak in order.

Some facilitators may be tempted to go around the room
and ask participants speak in turn. This is a mistake. People
who know it will be their turn next often worry about what
theyll say instead of listening. Better to just ask people to
speak when theyre ready. If for any reason participants are
slow to get started or seem guarded in their responses, the
facilitator can almost always loosen people up, writing
market to shy people or give away foodideas that
might even work in the right context.
No matter how seemingly silly, boring, or counterproductive an idea

may at first sound, the facilitator should record it without argument or
editing (except to summarize long-winded statements). Again, a big key
to freeing people up to tap into their creativity is to convince them there
really are no bad ideas. For example, if someone you plan to hire to work
in your new greeting card shop starts to explain why she thinks it would
make sense to also run a takeout coffee bar, dont laugh and ask for a
more serious suggestion. Just write on your white board sell coffee.
Who knowsif there is nowhere in the neighborhood where customers
can get a decent latte, a card and coffee shop might just work. Once
participants trust that all contributions really are welcome, its likely that
suggestions will come fast and furiously. After a half an hour, your sheet
might look something like this.
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How Can ABC Ventures Become Profitable?

Sell goods at costmark up services
Pay employees sales commissions
Free customer parking
Raise starting payretain worker loyalty
Deliver on Sunday
Target affluent young adults
Go online
Sell coffee
Provide a money-back guarantee
Deliver in the evening
Stay open Sunday
Buy XYC Inc.
Advertise in Spanish
Search for strategic partners
Open at two locations
Sponsor kids sports teams
Recruit workers of all racial backgrounds
Create a clever Yellow Pages ad
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How to handle a bingo! moment.

Occasionally during a brainstorming process someones idea
will seem amazingly spot-on. Everyone in the room may even
want to drop the game and discuss it. Because interrupting a
brainstorming sessionespecially one in its early stages
chokes off other ideas, its usually a mistake. But, as with all
rules, there are exceptions. Especially if lots of ideas are
already on the white board and the group is winding down, it
may be a good idea for the group to bore into one that
seems truly exciting.
In my experience, it takes less than an hour to extract all of a groups

good ideas on a particular subject. Especially if things are going well, youll
want to give people a short break and then ask them to consider a second
question. This time youll probably want to focus on a narrower issue, again
providing the group with as much useful data as possible. For example, if
your small spa offers a number of different massage and exercise packages,
and you want ideas on how you can better market the most profitable
ones, youll want each participant to have information about your sales
volume by package, profit margins, hours of peak usage, and so on.
Depending on your business, here are some areas you might want to
probe:
How can we identify our best potential customers?
How can we market more effectively to more people at an
affordable cost?
What additional products or services can we introduce?
How can we better distinguish ourselves from our competitors?
How can we increase sales and profits?
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Chances are your brainstorming sessions will produce at least several

excellent ideas you havent already thought of. And if you are lucky,
youll get one or more provocative new wrinkles that truly improve your
business. But its also possible that your brainstorming group wont produce
ideas that are likely to substantially improve your prospects. Assuming
you assembled an able, energetic group, this may be a signal that your
foundation business concept needs rethinking.
Get employees involved

Your employees undoubtedly know a great deal about your business. And
many of them probably care nearly as much about its success as you do.
In addition to including key employees in your brainstorming sessions,
here are some efficient ways to solicit their good ideas.
5/15 reports. Periodically ask everyone in your company to
spend no more than 15 minutes writing down their suggestions
for improving the business. You, in turn, should be able to read
each report in five minutes. Reports can be kept confidential if
the writers want it that wayotherwise, share the ideas with
everyone.
Notebooks. Give every employee who deals with the public a
notebook (paper or electronicit makes no difference) and ask
them to list all customer requests and suggestions.
Email conferences. If your business has an internal email system,
establish a new idea conference, where employees can post and
read suggestions. To keep things fresh, its best to time-limit each
conference. For example, on April 1, you might ask employees
for their ideas on improving customer service, giving them a
week or two to respond. Then on May 1, you could ask for ideas
about new products and services.
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Recognize employees for their good ideas

To encourage employees to stay interested in generating
ideas to improve your business, and at the same time avoid
jealousy or the feeling that one employee may be claiming
too much credit, its a good idea to do three things. First,
publicly recognize the person (or people) who contribute
the good idea. Second, spread the credit around as widely as
possible. For example, if someone in your warehouse figures
out a better way to track inventory, you might celebrate by
taking the hero of the day and a group of coworkers to lunch.
Of course, you will also want to remember the clever employee
the next time the opportunity for raises or promotions comes
around. Third, establish a bonus pool, with appropriate awards
made monthly or quarterly. For example, if your monthly
bonus pool was $1,000, you might in the first month award
all this to the two employees who codeveloped a significant
way to cut costs. But the next month, you might make three
different awards to people who suggested innovative ways to
market a new service. For good ideas on how and why to
establish a bonus pool, grab a copy of Ideas Are Free: How the
Idea Revolution Is Liberating People and Transforming Organizations,
by Alan Robinson and Dean Schroeder (Barrett-Kohler).
Get customers involved

If yours is an established business with repeat customers or clients, these
folks almost surely want to tell you things. Too bad that so few businesses
encourage them to do so and that many find ways to resist or even reject
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customers with good ideas. For example, recently when I was working
out at a gym, I overheard the manager discussing with a contractor the
layout of a new stretching room. The conversation was public, and another member (lets call him Craig) politely asked if the new room could
contain wider mats. When the manager didnt seem very responsive, Craig
pointed out that big men like himself who didnt easily fit on the existing
mats used two mats so as not to bump neighboring stretchers. Craigs
point that small mats actually resulted in fewernot morepeople using
the stretching space was so good that several other members immediately
spoke up to agree. Too bad that after listening for a very short time the
manager interrupted to say that the size of the mats wasnt his decision,
but he was pretty sure the owner was buying more of the small ones.
No big deal, you may be thinking. After all, most people wont
switch health clubs based on the size of their mats. Dont be so sure.
When I glanced at the window of another local exercise facility, I saw it
was advertising a new yoga area. Although I didnt bother to check the
new place out to see if the stretching area was better designed, Craig
might.
Not only is it wise to listen to good ideas your customers bring to
you, it also makes sense to solicit them. Depending on your business,
there are a variety of appropriate ways to ask for feedback. Often the
traditional method, asking interested customers to complete a brief
suggestions form before dropping it in a box or mailing it back in a prestamped envelope, works best.
But its a mistake to ask for suggestions unless you are prepared both
to implement the best ones and tell your customers you acted on their
feedback. If you take those two steps, youll not only increase customer
satisfaction (the mats really are wider), but will also reinforce the trust you
want them to place in your business (Craig and the others will feel greater
involvement with and loyalty to a business that pays attention to them).
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One good way to let people know that their suggestions arent being
ignored is to periodically list ones you have implemented. For example,
when the customers of Pams independent drugstore stuffed her new
suggestion box with good ideas, she created a small display area next to
the suggestion box listing a number of the ideas and what she had done
to implement them.
Take time to think about your business

Although its always rewarding to get your employees and customers
involved in suggesting ways to improve your business, its at least as
important to engage the creative juices of your single most important
employee. Thats youjust in case you have been too busy lately to
remember.
Your first thought may be, Oh, no. I already obsess about my
business. The last thing I need is to spend more time worrying about it.
Forgive me, but even if your business is a mighty success, you do need to
think about how you can apply new and innovative information to keep
your edge and stay ahead of competitors. Fortunately, done right, this is
very different from lying awake at night replaying familiar problems and
hassles for the 200th time. Just the opposite; to open your mind to fresh
ideas, you need to put day-to-day hassles aside.
I often do this by going for a long walk or jog. Getting more oxygen
to my brain, combined with the relaxation of the spirit I experience when
exercising, allows my mind to pop out lots of fresh ideas. Once this process begins, I focus my thoughts on one aspect of Nolos businessfor
example, our online site or our publishing strategy. On good days, when
ideas flow like a river in spring, my next step is to find a peaceful spot
where I can capture these thoughts in quick notes.
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You may already have your own favorite method of brainstorming.

Whether it involves going for a bike ride, listening to music, or picking
the brain of a creative relative or mentor, the key is to make enough time
to do it on a regular basis. Allowing yourself to be too busy to think
creatively is always a mistake. If you doubt this, consider for a moment
about how much of your working time is spent doing relatively unimportant tasks that wont contribute to your bottom line.
Taking a few days or even a week off is an excellent way to make
time and energy to think about strategic issues. Unfortunately, when I
suggest this strategy, many entrepreneurs say something like this: I
havent even had a decent vacation in yearsthere is just no way I have
the luxury of taking a week off. If thats your first response, seriously
consider changing your business. A person too busy to take a couple of
days off is almost always overextended and all too frequently operating a
business that is barely profitable.
Choose the Best Ideas to Implement

Choosing the best of a basketful of innovative ideas is usually no easy
task. But in a world where ideas are usually cheap and implementation is
often expensive, choose you must. One good approach is first to systematically rank your best ideas by awarding points on a one-to-five scale to
the ones that best fulfill your key criteria. For example, if your primary
goals are to improve customer access, increase sales, and to tell more
potential customers about your business, you would award points on a
one-to-five scale in each of these areas. Once this is done, adjust your
rankings based on how much each idea costs. One excellent way to do
this is to double the point total of ideas that can be implemented at the
lowest comparative cost while halving the points of the most expensive
ones. In my experience since youll never really know which ideas will
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work until you try them, its usually wise to try as many of the top scorers
as possible.
Example:
Amos, who has been laid off from his job maintaining computers
at a large corporation, decides to accept his fathers offer to take
over the family TV repair business and see if he can breathe some
life into it. He uses several methods, including a brainstorming
session with employees and suppliers, to come up with new ideas
to try to achieve his four big goals: increase sales, improve marketing, improve customer access, and reduce employee turnover. To
decide which he should implement first, Amos creates the following grid. He then rates the ideas he collects one to five as to how
likely each is to further his larger goals.
Idea
Increase
Sales
Improve
Help Keep or
Improve
Customer Recruit Talented
Marketing Access
Employees
Total
Paint the truck
Institute a 401K
plan for employees
Stay open longer

hours
Fix computers as
well as TVs
12
Amoss final step is to factor in how much each idea will cost
to implement. Realizing that painting the truck will cost very little,
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but the other three ideas will be expensive to implement, Amos

changes the totals as follows:
Paint truck
Institute a 401(k) plan
Open longer hours
Fix computers
Not surprisingly, based on these results, Amos decides to add

computer repair services and repaint his truck to say Big Screen
TV and Computer Installation & Repair.
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7
Target Your Customers
I dont know the key to success, but the key to failure

is trying to please everybody.
Bill Cosby
n the magazine and newsletter business, it is common to begin a

marketing campaign by hanging an oversized target on the wall as a
focus for a brainstorming session. In a process that is well described
by Cheryl Woodard in her book, Starting & Running a Successful Newsletter or Magazine (Nolo), you start by listing your most likely subscriber
groups near the center of the bulls-eye. Then, in the middle rings of your
target, you enter your pretty good prospects. Those who just might subscribe
are relegated to the outer edge. For example, the publishers of a home
furnishings magazine might list people shopping for a new house near its
targets bulls-eye, the soon-to-be-married in the next ring, and those whose
kids have just graduated from collegeand may have a few extra dollars
to refurbish the housein an outer circle. Similarly, a publisher of a
consumer product guide might be eager to reach reference librarians who
are regularly consulted about how to find consumer information, and less
eager to market to college students, many of whom are still trying to
perfect the art of asking their parents for more money.
Although you are probably not planning to start a periodical, the idea
of identifying your best customer groups in this way makes great sense.
Only when you can convincingly describe who your best prospective
customers are and why they will want to patronize your business can you
sensibly create a marketing plan to reach them. So if you plan to open a
dental lab making crowns, bridges, caps, and other oral paraphernalia, you
should be able to list near the center of your target the specific dentists or
groups of dentists you believe will use your services. In addition, you
should be ready to explain why they will do so. What utility or value will
you offer to convince area dentists to prefer your service?
Similarly, if you will open an aerobics and dance studio, you should
be able to identify the folks you are pretty sure will enthusiastically don
their leotards for your master classes, as well as the baggy-clothing set
you hope to coax into your early morning weight-loss session. And you
should be prepared to detail your marketing messagethat is, why, once
these people find out about your classes, they will prefer them to others.
Unfortunately, many businesses have only a hazy idea of their markets
and how to reach them. They follow the open-the-doors-and-hope-forthe-best marketing approach, which of course goes far to explain why so
many promptly fail.
Typical of this approach might be a new restaurant that places a few
ads in free local newspapers, does some leafleting in neighborhood office
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TARGET YOUR CUSTOMERS
buildings, places an early-bird special sign in the window, and buys into
several two-for-one coupon books. A couple of these initiatives might
make good sense if they were part of a coherent marketing plan aimed at
budget-conscious diners who live or work close to the restaurant. But in
the absence of such a focused plan, this approach is likely to do more
harm than good. For example, if this restaurant owner hopes to attract a
more affluent dinner crowd later in the evening, two-for-one deals and
cut rates to early diners are likely to amount to a kiss of death, because
many upmarket customers equate low prices with poor quality.
Given the fierce competition in the restaurant business, only establishments that figure out exactly who their customers will be, why these
people will prefer the restaurant over others, and how to successfully
reach them will have much chance of success.
Now and then, of course, businesses that dont do their marketing
homework are nevertheless lucky enough to succeed for some reason the
owner had never thought of. But then, as my father used to remark when,
despite his refusal to practice, he occasionally sank a 15-foot putt, even a
blind squirrel finds an acorn once in a while.
Be Specific
Ready to identify your most likely customers and explain why they will
prefer your business to others? Although this may sound easy, Ive found
that most small business owners cant do it. For example, here is a short
list of sadly inadequate marketing statements.
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Business
Inadequate Target Statement
Clear Zone car-detailing service
People who want beautifully maintained

cars
Happy Pup dog daycare center
Working people who dont want to leave

their dogs home all day
Divorce Yourself legal document

preparation service
People who have legal problems and dont

want to go to lawyers
Persimmon childrens clothing

store
People who want to buy clothes for kids
ClipZone hair cutting salon
Women who want an up-to-the-minute

haircut
Each of these descriptions of the target market is so general that its

close to useless. To see why, lets take a closer look at Happy Pups claim
that its market consists of working people with dogs. Well, its a start. But
here are just a few facts it doesnt allow for:
The great majority of working people cant possibly afford Happy
Pups going rate of $25-$40 a day for dog daycare.
Just because a dog owner works doesnt mean someone else in
the family isnt available to care for Bingo.
Old dogs sleep a lot and may be content to stay home alone.
Other area dogsitting services are availablewhy should dog
owners choose Happy Pup?
In an effort to identify likely customers, lets now assume Hillary,
Happy Pups owner, works through the disciplined targeting exercises
discussed later in this chapter. Her result is this more detailed profile:
Affluent, working people with active dogs who want to provide them the
highest quality of care. Because this statement takes into account the
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owners ability to pay and desire to provide their dogs with excellent
daycare, its a big improvement. But several crucial marketing factors are
still missing. Hillarys biggest omission is her failure to consider location.
Assuming most people wont drive more than five to ten miles out of their
way to drop Bingo off, its obvious that Happy Pup should concentrate its
marketing efforts on affluent owners of younger dogs who live or work
fairly close to Happy Pups facility.
When it comes time to prepare a marketing message for this group,
Happy Pup will need to include an explanation of why dogs really are
pleased by its facility. Do they get more exercise? More attention from the
staff? Are there other ways in which Happy Pup offers a better service
than its competitors?
Now its your turn. Considering the following three key marketing
principles, identify your most likely groups of customers.
Need. People who have a pressing need for your goods or
services, even if that need is occasional or intermittent, are

obviously more likely to patronize your business than those who
dont.
Price. In some markets (discount hair cutting or fast food, for
example), people often make decisions based on who offers the

lowest price. But in many others, people are more likely to
patronize the business they believe provides the best value,
regardless of price. A shoe store that sells well-made, but higherpriced shoes may do better than a low-cost competitor, and the
drycleaners seen as the most trustworthy in town may be regarded
by many customers as providing a better value, even though it
charges more than many competitors.
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Access. If cost and quality are equal, customers will usually
follow the course of least resistance, patronizing easy-to-access

businesses and avoiding those that are tough to get to.
Get out a big hunk of paper, draw a bulls-eye, and list your best
prospects closest to the center. If possible, get help from business-savvy
friends, family members, and employees. At this stage, dont complicate
the exercise by simultaneously trying to figure out how youll reach the
people you target. No question, that next step is crucialbut for now, just
identify the groups or individuals who are the most likely to buy what
your business sells and be ready to explain why each of these groups will
prefer your business. Later, it will be time to develop a plan to reach them.
Example:
Sandy, a fast-pitch softball coach, opened a batting cage to teach
hitting to young women softball players. With softballs fast-growing popularity, Sandy hoped she would draw enough students to
allow her to quit her day job. During the prime spring months,
more girls tried to book lessons than she could accommodate. But
during the rest of the year, the flood of students slowed to a
trickle. On a Tuesday night in October, Sandy was lucky to give
two half-hour lessons.
To attract more off-season students, Sandy decided to engage
in a marketing campaign, a subject about which she knew substantially nothing. When Sandy first tried to describe her target
audience, the best she could come up with was girls and young
women age 8 to 18 who want to play better softball and who live
within 20 to 30 minutes driving distance of my facility. Realizing
she had described her existing marketthe one she already knew
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wasnt producing enough year-round businessshe resolved to

do better.
After some thought, one of the key groups she wrote in her
targets inner circle was serious players age 12 to 18 who play
tournament softball on club teams much of the year, who live
within an hour of my facility, and who are advanced enough to
appreciate that my teaching methods are state-of-the-art. Although
there were far fewer young women in this travel ball cohort than
there were little league or high school players, Sandy believed
they (often with parental encouragement) were highly motivated
to improve their skills. If she could reach them with the message
that she was a super teacher and could help polish their skills to a
college scholarship level, they might sign up for lessons yearround.
Sandy also made several other entries close to her marketing
bulls-eye. One was for high school and club softball coaches who
might want to rent her cageor the extra space in the back of her
facilityduring bad weather months to run their own hitting
clinics. Although neither of these initiatives would directly help
Sandys teaching business, they would significantly reduce her
overhead costs. Finally, Sandy listed young baseball players in one
of the outer rings of her target. She wasnt sure high school boys
would take lessons from a woman, but she thought younger ones
with older sisters who she had successfully coached well might.
And if they did, and noticeably improved their performance, their
friends would follow.
Like Sandy, once your target is complete, its time to move on to step
two of your marketing plan. How do you reach the people near the center
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of your bulls-eye? The best approach depends on the field you are in and
the number of people you need to reach. A physical therapist and a floor
refinisher will adopt very different types of outreach plans. But there is a
common element to all good small business marketing plans. You must
empower, motivate, and encourage the customers your marketing efforts
recruit to recommend your business to others. (See Chapter 8, Market
Your Business Creatively.)
Example:
Sandys decision to market her services to serious softballers over
a much larger geographical area paid off. She began by calling the
30 or so coaches of the club teams within a 40-mile radius of her
facility and offering to run free weekend hitting clinics for their
players. When a number jumped at the chance, Sandy was able to
show off her indoor training facility and sophisticated teaching
techniques. Almost immediately a number of players who participated in the free clinics signed up for private lessons. As their
hitting quickly improved, it didnt take them long to tell their
athlete friends about how much Sandy was teaching them.
Fueled by this positive word of mouth, larger numbers of
committed athletes from more distant areas began to sign up for
regular lessons. Before long, Sandy was almost as busy during
winter as she was in the spring, and was able to support herself
coaching full time.
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Go After Both Novice and

Experienced Customers
In developing your targeted marketing plan, realize that the potential
customers of many businesses tend to fall into two categories: people
who have had experiencesometimes lots of itwith businesses like
yours, and those who are new to the field. For example, if you open a
mid-priced shoe store, all of your customers will have patronized similar
shoe retailers and will have a pretty good idea of what to expert. To
impress them, youll need to exceed these expectations. By contrast, if
you start an upscale vintage clothing boutique in an area where shopping
for used clothes has always meant going to Goodwill or the church
jumble sale, many of the people you hope to attract will never have dealt
with a store like yours. Just your presence will offer potential customers a
unique retail experience. But to succeed, youll have to convince them
that paying just a little extra for your cutting-edge experienced clothing
can be simultaneously frugal and exciting.
All of this is just another way of emphasizing that youll have a very
different job attracting and satisfying newbie and experienced customers.
For example, if yours will be the third Indian restaurant in town and at
least one of the others is good, many of your initial customers will know
enough to hold you to a high standard. By contrast, if yours is the first in
your area, your challenge will be to attract and educate a clientele that
knows little about the food you offer.
If you havent thought about potential customers in this way, you may
be tempted to ask which group is preferable. Is it easier to convince the
uninitiated to try something new or to market to a group of experienced
and possibly jadedcustomers? There is no one answer for all businesses.
In some instances it may be appropriate to go after both experienced and
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novice customers, but doing so will always involve different strategies.

Youll need to develop a marketing plan specifically designed to reach
whichever group your business targets.
Coffee is a field where this has been famously done. Forty years ago,
Americans drank uniformly terrible coffee whether they bought it in cans
and made it themselves or ate out. Only a relatively few coffee drinkers,
who had spent time in Europe and the Middle East, where coffee quality
was far higher, even knew what they were missing. Then, specialty coffee
stores, that sold richer, more varied coffee and coffee drinks in Europeanstyle shops, began to pop up. One of the first was Peets, a tiny Berkeley,
California, company. Like Peets, many of these new-style shops started in
university towns where there were at least small pools of experienced
customers. At first Peets and the other coffee shop innovators didnt reach
much beyond their small audience of coffee aficionados. But then, gradually,
largely by word of mouth, more and more people became converts to
better coffee sold in a more pleasant retail environment. Eventually, of
course, the combination of an improved product sold in stylish coffee
bars changed the habits of millions of American coffee drinkers, and
created huge numbers of new ones.
Although its probably overly optimistic to think that youll come up
with a similarly world-changing business, it often does make sense to
consider ways you can create loyal customers by improving the quality of
familiar products or developing better ways to market them. Customers
who perceive that you offer a more valuable product or service are highly
likely to both patronize you repeatedly and tell others of their discovery.
Example:
Roman dreamed of opening his own gourmet takeout pizza shop.
Knowing, of course, that virtually every American already eats
pizza and that there were dozens of competitors in his area,
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Roman realized that to succeed, step one was to produce a pie so

good that longtime pizza lovers would brag about it. To this end,
Roman spent months visiting and sometimes revisiting the best
independent pizza shops in several states. Every time someone
told him about another super place, he made it a point to taste
their crust and analyze their toppings. Coupled with his own
experience, seeing what worked in the marketplace convinced
him to develop a line of deep-dish thick-crust vegetarian pizzas
very different from the mega-meat pies featured by local franchised
operations. As part of doing this, Roman created his own group of
a dozen pizza lovers to act as his tasters. Convening the group
half a dozen times, Roman presented dozens of variations of his
basic recipes until an enthusiastic consensus developed as to
which pie really was best.
But Roman worried that in a hyper-competitive business,
creating a uniquely mouthwatering pizza wouldnt guarantee
success. What if not enough people bought it to cover his costs?
Identifying time-challenged two-worker families as a crucial slice
of his target market, Roman decided to focus on making it easy
for people to get his pizzas.
To this end he borrowed two innovative marketing ideas he
thought would be successful for the neighborhood shopping
street location he planned. The first consisted of a half-baked
pizza that could be bought hours ahead of time and finished in a
home oven. Second, on busy nights Roman decided he would
cook a steady stream of his most popular pies before he received
orders. That way when the flood of last-minute orders threatened
to cause delays, he could say, Todays two special pies are ready
now. Otherwise there will be a 30-minute wait. In short, by
focusing both on creating unique pizzas and on meeting the
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needs of pizza eaters who are pressed for timeboth early birds
and night owlsRoman gave experienced pizza eaters a reason to
patronize his restaurant and at the same time expanded his potential market.
Dont Forget Your Current Customers

No matter what your field, if you are preparing a marketing target for an
established business, the words current customers should almost always
be listed near the bulls-eye of your target. Thats because with a very few
exceptions, such as businesses that market to tourists or help people with
onetime problems (divorce, tubal ligation, and cremation come to mind),
your existing customers are the easiest to reach. Although it may seem
obvious that the customer list of a successful business is a golden asset,
many, if not most, small businesses ignore it. Instead of making special
offers to their existing customers and working to develop more attractive
goods and services, they concentrate their marketing efforts on the more
difficult task of trying to locate new ones.
How do you find out how you can sell your current customers more
or different products? Simple: Ask. If you stay in close communication with
your customers and make it easy and fun for them to tell you about their
needs, they will. Business owners who depend on just a few customers can
often best do this in person. Businesses with a larger customer roster will
often prefer to periodically send customers a short, easy-to-fill-out form
asking for suggestions about new and improved services. When Roman
asked his pizza-eating customers, the response he got boiled down to
gourmet salads. As a result, using only the freshest ingredients, Roman
promptly created a spinach, mixed green, and fruit salad and happily
found that he could actually mark up the salads more than the pizza.
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Example:
When her dad died, Mandy took over his business, which pumped
out vacation-home septic tanks in a resort area. Soon she got a
call from Janet, a customer whose main home was in a city several
hours distant. Could Mandy take some cat food with her and feed
the feral cat that was living under the porch, Janet asked?
Not only was Mandy happy to do this, she was even happier
to prepare a questionnaire to all her septic tank customers, asking
them whether there were additional things she could do when she
visited their properties. When quite a few responded yes, Mandy
developed a service she called Property Check. For a modest fee
she would work with the homeowner to develop a list of everything the homeowner wanted checked. Each time Mandy visited
the property, she promptly emailed to the owner a list of all items
checked and any problems discovered. Before long, Property
Check became so successful that Mandy hired an assistant to drive
the honey wagon and concentrated on developing more new
services for absentee owners.
Say thank you.

If your customers are kind enough to fill out a feedback form
or otherwise suggest ways you can introduce new or better
goods or services, always thank them. A brief note is a good
way to do this: Including a small gift is even better.
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Here are just a few examples of businesses that profitably concentrate

on existing customers:
A dentist who, after fielding a number of questions from patients
with snoring and other sleep problems, decides to educate himself on the mouth guards and other devices that can help restore
even breathing and a good nights sleep. When he tells his patients
about his new specialty, a number ask for help. In addition, as
word of his sleep work gradually spreads, he is able to attract
new patients to what quickly becomes the highest-profit and
most interesting part of his practice.
A used bookstore that decides to stock 750 new titles in the subject areas most popular with its customers, including biography,
science fiction, and mystery. Displayed on attractive racks near
the front of the store, these books are immediately popular with
used book customers who occasionally splurge on a new title.
Sandy, the softball coach we met earlier in this chapter, creates a
small retail area to sell several of the swing-training devices she
uses and recommends. Offering them, along with high-end bats,
hitting nets, instructional videos, and other hitting paraphernalia,
she nets over $1,000 per month from her existing customer base.
A small-business lawyer develops a specialty in helping clients
cope with and, if necessary, fire problem employees. In addition
to letting clients know he is available to help with crisis situations,
the lawyer tells his existing small business clients that for a very
reasonable fee he will help them create an employee handbook,
a necessary first step to help guard against frivolous employee
lawsuits.
A restaurant in a popular tourist area fills an underused space
near the cash register with locally produced mustards, jams, hot
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sauces, and other gourmet specialty items. The products are sold
individually and also in boxed collections ready for mailing. Just
produce your credit card and the addresses of family members
and friends, and the restaurant will do the rest. The program is so
popular the restaurant sets up a website to handle repeat orders.
Although the wisdom of developing and marketing new products
and services to existing customers may seem obvious, it can be difficult to
accomplish since to work in the long run you need to provide a product
or service of real utility. I can vouch for this out of my own experience.
For many years, Nolos self-help law customers asked us if we could
recommend lawyers. Often they didnt want to hire the lawyer long-term,
but only to get the answer to a fact-specific question or obtain advice in a
complicated legal area beyond the scope of Nolos materials.
One day at a marketing meeting, someone asked for about the
thousandth time why Nolo was trying so hard to find more customers for
its self-help law products, but ignoring people who wanted to solve their
problems with limited help from a lawyer. In the middle of repeating the
answer I had given for yearsMost lawyers are hostile to self-helpers and
wont help them on a question-by-question basisI realized that it had
been years since Nolo had taken a fresh look at this area. And in the
intervening years, at least some lawyers had become more open to
working with self-helpers who wanted to purchase limited legal advice.
With our eyes newly open, Nolo decided to form a relationship with
the ARAG group, a prepaid legal insurance company whose main business consisted of providing legal help to people who worked for large
corporations. As part of ARAGs employee benefit program, plan lawyers
answered legal questions by phone. Now, under Nolos arrangement with
ARAG, Nolos Internet customers can call a lawyer in their own state (or
specialist area) and for a very modest fee discuss their legal questions or
155
problems. For Nolo, offering this new service to our customers has been
solidly profitable from the beginning. Too bad it took us so long to take
our marketing blinders off and introduce a new product our customers
had actually been requesting for years.
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8
Market Your Business Creatively
If you hype something and it succeeds, youre a genius;

it wasnt a hype. If you hype something and it fails,
then its just a hype.
Neil Bogart
nce, when speaking at a workshop for people interested in

starting a small business, I met a man who was optimistically
planning a new venture, despite the fact that he had suffered a
long string of failures. After listening politely to my remarks, he pulled me
aside, lowered his voice, and said that after many years of making mistakes
he had finally figured out what he needed to do to make his new venture
succeed. After a dramatic pause, he all but whispered, Plenty of money
for advertising.
I was tempted to sit the fellow down and explain why I had reached
just the opposite conclusion. But seeing that his eyes had the glint of the
true believerand remembering I was late for my daughters softball

gameI decided to save my polemic for another day. Here it is.
What Advertising Canand CantDo

There are at least half a dozen reasons why spending significant money
on advertising rarely pays off for a small business. But before I give you
the whole list, lets start with two big cautions.
The Biggest Problems With Advertising

The first big drawback is that spending all or most of your promotional
budget on advertising risks stifling more imaginative initiatives that can
attract more long-term customers at a far lower cost. Much like giving a
teenager a fat allowance and then wondering why she doesnt get a job,
once the monthly ad buy is made, too many business owners lack
incentive to work hard to get the word out in other ways. Why should
they bother? Their ads are already out there attracting all the customers
they need, right? Unfortunately, its rarely that easy, even for large businesses with huge ad budgets. Its virtually never a winning strategy for
small outfits with very limited marketing budgets.
Example 1:
Ted is an early retiree lucky enough to have received a generous
compensation package from his former employer. With money in
his pocket and his kids grown, Ted is ready to fulfill his lifetime
dream of opening a small bookstore, which he calls Academy
Books. Before the doors are even open, Ted signs an expensive
contract with a weekly newspaper to run a large display ad in the
next 12 issues. When Ted writes the check and hands over the
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MARKET YOUR BUSINESS CREATIVELY
simple ad copy, he feels goodhes taken a big step towards

getting word out about his new shop. After two months, when the
ad doesnt seem to be producing enough customers even to pay
for itself, let alone help Academy sell enough books to earn a
profit, Ted calls the newspaper to express his concern. Joy, the ad
salesperson, explains to Ted that ads work best when they run for
an extended period and that she thinks Teds copy needs more
zip. So with Joys help, Ted designs a zippier ad, signs a second
contract, and continues to hope for the best. When sales dont
improve much, Ted begins to worry that Academy Books will
never succeed.
Example 2:
Instead of only buying advertising, Ted decides that he needs to
target readers who live and work close to his shop and find lowcost ways to reach out to them. Accordingly, Ted arranges a
meeting with Ann, the owner of WakeUP, a neighboring coffee
bar, and proposes a series of joint promotions. These include
having WakeUP place a small display of Academy bestsellers in
the coffee shop and having Academy give every book purchaser a
50-cents-off coupon redeemable at WakeUP. In addition, book
lovers who attend one of Academys frequent author readings will
be able to order coffee or tea delivered right to the bookshop.
When several of these and other promotional ideas work well
to increase both WakeUps and Academys sales, Ted and Ann ask
Molly, the owner of Mollys Place, a nearby restaurant, to join
their local marketing group. Now, on the evenings when Academy
Books schedules readings by particularly popular authors, Mollys
Place provides a fixed-price buffet supper to super-fans willing to
come early and pay a few extra dollars to break bread with the
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author before everyone adjourns to the bookshop for coffee and

the reading. Eventually these evenings become so popular that the
local public radio station asks to do a live broadcast from the
bookstore. To express their appreciation and support public radio,
all three businesses contribute thank-you gifts for listeners who
participate in the stations pledge drives. For example, if you join
at the $100 level, you receive a free half-pound of coffee at
WakeUP, 20% off your next book purchase at Academy Books,
and a free dinner at one of Mollys book lovers buffets.
Obviously, there are lots of differences between the marketing
approaches in these two examples. But the most important is that in the
second, Ted uses his energy and common sense to design low-cost ways
to let readers in his target group know about his business. In Example 1,
he simply pays a local newspaper to try to do the entire job for him.
My second caution is that before you can use advertising intelligently,
you must have realistic expectations as to what you hope to accomplish.
Advertising may bring people into your business, but it doesnt make them
buy anything, and it certainly doesnt encourage them to tell others about
you. Too often advertising attracts fickle customers. After all, people who
will try out your business because you advertise a sale or other special
deal will try your competitors for the same reason. By contrast, positive
recommendations from satisfied customers to people like themselves are
much more likely to build customer loyalty, the real engine that will drive
your future growth.
True, like churches that recruit Easter and Christmas worshippers and
then try to turn them into regular churchgoers, youll hope to turn people
who respond to your ads into loyal customers. But its my guess, based
on experience, that if you used the same funds to better meet the needs
of your faithful followers, those people would take care of recruiting others.
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Other Downsides of Advertising

The notion that prosperity will envelop your business like the winters first
heavy snow if only you can design a brilliant ad and place it in just the
right spot is largely a myth. In the small business world, where saturation
advertising is unaffordable, its more likely that your ads will produce a
brief flurry of interestsparse and quick to melt away. Heres why.
Money spent on advertising isnt available for more important
needs. In a perfect world, a small business owner would have enough
money to pay for an ad campaign and other business priorities. But in the
real world, where the vast majority of start-ups are short on capital, its
almost always more sensible to spend most of your scarce dollars on
improving the core competencies of your business than on advertising.
First, invest in the quality of your goods and services, provide easy and
affordable customer access, and work to attract and keep top-quality
employees and contractors. Only if you have money left over should you
even consider spending it on advertising.
Your message probably wont get through. As you well know,
Americans are bombarded by thousands of ads each day, many of them

part of big-dollar, multilevel saturation marketing campaigns conducted
by huge corporations. In this ever-present ad cacophony, your small
business ad is likely to be drowned out, which helps explain why, if you
do plan to advertise, it makes sense to try an offbeat humorous approach.
For example, as reported by the Associated Press, when coffee served by
Fireside Books of Palrorer, Alaska, got poor reviews, the owners David
Cheezem and Melissa Behnke just sort of ran with it and began selling
t-shirts printed with good books, bad coffee. Because this made people
laugh, the store followed on with a bad coffee poetry contest and even
sells Real Alaska Ugly Coffee beans. As Cheezem points out, My feeling
161
about marketing is theres so much hype everywhere, Id rather be selfdeprecatory. Get people curious, they can find out for themselves.
People distrust ads. I regard most ads to be at best half-honest and
many to be first cousin to consumer fraud. Given that Im obviously not

alone in my negative attitude, you need to recognize that your ads may
discourageor even drive awaya significant percentage of your existing
customers. To see how this works, imagine you spot a new restaurant that
looks so inviting that you consider booking a table when your in-laws are
in town. A few days later you receive a card deck in the mail that includes
discount coupons for rural home sites, a backyard spa, a car repainting
service, and several two-for-one meal offers from local restaurants, including the one you just discovered. Is your first thought Hooray, I can get a
great deal at a terrific restaurant? Or are you more likely to decide to pick
a different eating place? If you would make your reservation elsewhere,
give a thought to how other types of ads might similarly repel your
prospective customers.
In the rare instance when advertising does produce lots of customers,
your business may not be able to handle the rush. Once, when I badly
needed an electrician, I did something a little unusual for me and responded

to Reliant Electrics large advertisement in the local weekly paper. But
when I called, they told me their waiting list was two weeks. I relate this
little story because it illustrates an all-too-frequent problem with advertising.
If an ad does produce lots of customersperhaps by promising a special
dealthe business often cant cope, and many people have a negative
experience. Certainly Im not likely to call Reliant again, especially since
Bens Electric, the outfit recommended by the knowledgeable friend I
called when Reliant couldnt handle my business, showed up the next
morning, and fixed my problem at a reasonable cost.
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Further reading on advertising and

marketing.
Some of the points I make in this chapter come from my
experience at Nolo. But I learned many others from an
inspirational little book Nolo publishes and which I had the
good fortune to edit, called Marketing Without Advertising, by
Michael Phillips and Salli Rasberry. Its become a sort of inhouse marketing bible here at Nolo. I suggest you read its
greatly expanded discussion of advertising and its alternatives.
Like all Nolo publications, its available at Nolo.com. Or
check it out of your librarythat way your marketing efforts
will be off to a truly cost-effective start.
How to Use Limited Advertising Effectively

Some types of ads, including those in the Yellow Pages, in the services
section of a pennysaver newspaper, and in special-interest media, such as
publications and websites aimed at parents, sports enthusiasts, or dog
lovers, can be effective at letting people know about your business. They
work precisely because, unlike most ads, they dont try to reach a broad
audience. Only a few people will ever see thembut those people are
likely to be receptive. Although the wisdom of planning to have customers
find your ad, rather than hoping your ad finds a customer, may seem
obvious, it is the opposite of the standard shout-from-the-mountaintop
advertising approach followed by most American businesses.
To narrowcast, not broadcast, your promotional messages, the best
approach is to list your products or services where potential customers
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are likely to look for them. For example, if you own a summer horse
camp, buying a classified ad on an equestrian website may pay for itself
many times over.
Here are some places where listing-type ads may work:
Auction websites such as eBay, and single-interest sites where
goods and services are listed by category or keyword.
Publications aimed at visitors or new residents. For example, list
your big-city restaurant in a guide given to guests at local hotels.
Publications or websites of nonprofit organizations or other
groups popular with people you want to reach. For example, if
youre a child care provider, place an inexpensive ad in the
newsletter published by a working moms group.
Special interest journals. For example, an architect who specializes
in designing fire stations might place a small monthly ad in
journals read by city, county, and state planning officials.
Trade publications and struggling local media outlets. Although
quality media outlets keep their editorial and advertising departments completely separate (putting an ad in The New York Times
wont buy you an inch of coverage in its news pages), others are
far less scrupulous. Like it or not, in many fields, the best way to
ensure regular editorial coverage in a particular publication is to
purchase an ad contract. Usually there is no need to ask for any
quid pro quo in terms of coveragein most cases youll get it.
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Example:
Emiko lives in Metropolis, a good-sized city that is a popular
international tourist destination. Reasoning that because the cityoperated tourist office is small and shabby, there is a golden
opportunity for a private business, she opens Metropolis Today in
a downtown storefront. She provides free maps, walking tours,
and restaurant lists, but also sells tours, event tickets, and other
tourist-focused goods and services, including Metropolis-branded
clothing, books set in Metropolis, and even a line of hand-painted
Christmas ornaments depicting Metropolis scenes. Realizing that
because she is targeting tourists and other visitors, it will be very
helpful to have regular articles written about her new business in
the weekly tourist newspaper distributed free at area airports,
Emiko buys an ad package. A few weeks later, the newspaper
writes an extensive feature about her innovative new enterprise
and, even more important, adds Metropolis Today to its Good
Tourist Info list, which appears in every issue.
Before you commit to any ad campaign, even a modest one, test it.
Experiment with language, layout, and, most important, different publications. For example, instead of running the same small ad promoting your
tai chi classes in the bodywork section of a free weekly paper for two
months, run several different ads for two weeks each and keep track of
which draws more customers.
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How to Write a Good Ad

Pull out a pennysaver magazine or the Yellow Pages and turn to a popular
category such as Roofing or Plumbing. Read a bunch of ads and circle the
ones you feel best speak to your type of customer. If you are selling primarily
on the basis of a low price, youll likely identify a number of ads that
effectively and loudly say cheap. One popular way to do this is to quote a
competitive price and then further sweeten the deal by offering a dollars
off coupon.
But if, as is more likely, you want to market to customers whose
main goal is to find a reliable, high-quality provider, then youll want to find
ways to emphasize these attributes. Here, assuming they fit your facts, are
several ways to do this:
How long have you been in the business or the trade?
What relevant education or experience do you have?
Do you provide references or offer a guarantee?
Is your business family-owned?
Can you respond to customers needs on a priority or emergency
basis?
When you identify the key marketing elements you believe will best
speak to the customer groups you want to reach, write a draft. Use the
simplest, most direct language you can. Then, unless you are an experienced
writer, enlist a friend or family member with excellent language skills as
your editor.
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Getting Customers to Recommend

Your Business
As discussed above, I believe that How can I create a winning ad campaign? is the wrong question. Better to ask, How do I create a business
so compelling that my customers will recommend it to others?
Think about how you and your family decide where to buy goods
and services. What process did you go through the last time you chose a
house painter, gardener, lawyer, or dentist? Also think about the last few
times you went out to eat or attended a movie. Ill wager that in many, if
not most, of these instances the recommendation of a trusted friend or
acquaintance, not an ad, helped inform your decision. Ill also bet that
another source of the information you used to make at least some of these
purchasing decisions came from media people you trust. For example, you
might have picked a movie or restaurant in part because it got high marks
from a critic you respect, or called a contractor whose name appeared on
a local consumer groups highly approved list.
It will help reinforce the point that advertising is usually not the best
and most cost-effective way to reach new customers if you now make a
mental list of five local small businesses you regularly patronize and respect.
How often have you recommended each of these enterprises, or at least
told someone that you patronized them? If your answer is regularly, its
obvious that these businesses are doing so many things right that you,
and probably many other satisfied customers, promote them for free.
Here are some key attributes of businesses that people are eager to
tell their friends about.
Quality. Provide excellent goods and services that meet, or preferably
exceed, those offered by your competitors. To be sure you really do this,

set up a system to benchmark your offerings against those offered by
competitors. For example, is your eyeglasses shop really the cleanest, best
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stocked, and most accessible in town? Does your staff deal with customers
more promptly, pleasantly, and knowledgeably than do other stores
employees?
Keep it clean.
A small, but nevertheless significant, slice of the public makes
many purchasing decisions based on how clean a business is.
For example, I have several friends who wont patronize a
good-sized list of local restaurants because they arent spotless. Similarly, a member of my family only buys one brand of
gas, based on her belief that their restrooms are usually the
cleanest. Fortunately, since insisting on the highest standards
of cleanliness doesnt cost much, and it really will distinguish
your business from its sloppier competitors, its an easy way
to create a marketing edge.
Freshness. We humans are fickle. If a flashy new shop opens, many

of us will give it a try and, if we like it, abandon our old patronage habits.
It follows that, especially in fields where style is a key element of a
businesss overall presentation, you need to guard against the possibility
that your customers will become bored and will drift away to trendier
providers. Often the best way to do this is to regularly refresh the look
and feel of your business. For example, if your tile shop looks like something out of the 1980s, youre in trouble if a competitor with a cool new
look opens down the block. Lots of homeowners who want a state-of-theart kitchen or bathroom are likely to patronize the new outfit, even if both
of you stock many of the same products. If, on the other hand, you update the look of your shop and regularly improve its stock, you may
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discourage other shops from opening nearby or, even if one does, hold
onto most of your customers. (In Chapter 6, Innovate Now and Forever, I
discuss in more detail why its essential to build continuous innovation
into your business.)
Put change on automatic.

From waiting areas and conference rooms to signs, store
windows, websites, and stationery, all of your businesss public
spaces, displays, and logos should be updated on a regular basis.
Dont wait until they look a bit tatty to make a change. Adopt
and stick to a schedule to change, renew, and redecorate.
Helpfulness. Customers want to know how to use your goods and
services efficiently. The more honest, easy-to-understand information and

handholding you provide, the more likely they are to purchase. For example,
a plant nursery that offers classes on how to grow abundant vegetables will
sell far more tomatoes than one that simply displays the plants. Similarly,
a lumberyard that provides lots of how-to advice will sell lots more of almost
everything than one that assumes customers know what theyre doing.
Providing good information doesnt result only in increased sales. It
can be another great way to motivate customers to recommend your
business to others. For example, a doctor whose practice is built around
educating patients about eating a healthy diet, exercising, and other ways
to care for themselves may actually see these patients less. But people
who feel their doctor is committed to helping them lead healthier lives are
almost sure to refer others. Similarly, a lawyer who fills the waiting room
with top-quality legal information (including self-help materials describing
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tasks people can do for themselves) will get more referrals than one who
displays copies of last years Field & Stream.
Example:
Real estate brokers Ira and Carol Serkes, of Berkeley, California,
own a good-sized panel truck that they make available free to
their clients for local moves. And when the truck is not being
used as a small moving van, its available free to community and
charitable groups. As it rolls around town, the van prominently
advertises the Serkes real estate business. But since Ira and Carol
are simultaneously providing a needed and appreciated service,
their moving ad is seen in a positive light.
Customer recourse. Everyone wants to feel they are in good hands
when they patronize a business. Providing high-quality goods or services,

of course, is a big part of accomplishing this goal. Another important part
is letting customers know that should anything ever go wrong, you can be
counted on to put it right. Backing your products with a no-hassle,
money-back guarantee is one excellent way to convey both of these
messages. Customers intuitively know that sloppy operators cant afford to
stand behind their offerings this way, and their comfort level with your
business goes upmeaning they will be more likely to recommend it to
others. For example, at Nolo, we offer a money-back guarantee if youre
not satisfied with any of our products, no matter where or when you
bought it. As a result, our customers often compare us favorably to other
publishersand especially to the legal profession.
Easy customer access. Lack of parking is one of the biggest reasons
I avoid a business. Failure to return my phone calls in a timely manner is

another huge turnoff. And, of course, there are many other ways poorly
run small businesses place roadblocks in their customers paths, including
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confusing voicemail systems, out-of-date websites, and inconvenient

business hours. One business I know actually maintained an unlisted 800
number, apparently afraid that if it was readily accessible, too many
customers would use it. Enough said, I hope. Its always wise to spend
thought, creative energy, and, if necessary, money on improving in-person and electronic access to your business.
Responsiveness. Many people in your businesss network, including
customers, suppliers, employees, freelancers, and others you encounter

regularly, will be delighted if you ask them to suggest improvements.
Unfortunately, few businesses take the time to ask or have the mindset to
listen. If you are one of them, take your head out of the sand and find
appropriate ways to encourage feedback. And once you get it, be ready
to act on the best suggestions.
Example:
Earlier in this chapter, I mentioned that when I was put off by an
electrician whose ad I saw in the local paper, I got a recommendation from a friend and called Bens Electric. Ben not only did a
good job repairing several broken outlets and fixtures, but as he
left, he asked if all my other systems were working well. This
jogged my memory about my wonky front doorbell, and I asked
Ben if he could replace it. He replied that he didnt install new
doorbells, but would be glad to help me with other purely electrical
problems.
A week later, Ben called me and said that because I wasnt
the first customer to ask, he had decided to install doorbells. He
had picked up several catalogs from an electrical supply shop and
would be happy to show them to me at my convenience. I was
not only pleased to get my doorbell replaced, but to deal with
someone willing to listen and respond to my needs. And I was
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even more pleased when I next encountered Ben six months later,
when he thanked me for helping nudge him into offering what
had turned out to be a profitable service.
Dont ask for feedback unless you are

serious about making changes.
I used to patronize a neighborhood restaurant that somehow
survives despite its lousy coffee. When the owner placed a
suggestion box on the counter, loads of people quickly
pleaded better coffee, fix the coffee, kill your coffee,
or something similar. After a few weeks, when the coffee
didnt improve, I asked a waitress about it. She replied, The
owner says there is nothing wrong with the coffee and since
that was the main complaint, she doesnt plan any changes. I
dont know about other customers, but now I go out of my
way to eat elsewhere.
Getting Free Publicity

Media exposure for your business is often free and surprisingly easy to
get. Radio and TV stations, magazines, online sites, and other types of
media need piles of new content daily. It follows that with a little imagination, many businesses can figure out ways to get freeand often far
more valuablecoverage than they could ever buy. A greengrocer who
distributes weekly freshest produce tips to local media outlets and is
frequently interviewed on the subject is one illustration. A financial planner
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who regularly appears on a local radio talk show called Saving for Retirement is another.
Providing consumer advice is only one way to get free exposure. If
theres something special about your businessand there should bethe
local media, at least, may want to report on it. And dont be discouraged
by the belief that your business isnt newsworthy. With a little creativity,
every business has an interesting story to tell.
Example:
Marty and Karen run a K-8 private school, Meadowbrook. They
get most of their new pupils through referrals made by parents of
current and former students. But when they decide to rent an
adjoining building and double the size of the school, they fear
that word of mouth wont fill up all the new desks quickly enough.
One way to try to do this would be to run newspaper ads.
But Marty and Karen know that excellent schools generally dont
need to advertise, although they may buy listings in specialized
publications aimed at parents. Because advertising might put the
school in the company of schools with lesser reputations, it might
even disappoint the parents of current students. What are the
alternatives?
One is to go out and get the school some favorable media
coverage. To do this, Marty and Karen start by creating a press
package. On a single sheet of paper, they list Meadowbrooks
innovative educational programs and other things they believe
make the school special:
Meadowbrooks commitment to improving all students
language skills by teaching Latin and French beginning in
the sixth grade
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Meadowbrooks decision to teach math one grade level

ahead of the local public schools so that Meadowbrook
kids will be better prepared for the rigors of advancedplacement high school math courses
Meadowbrooks program of encouraging social interaction
among older and younger kids (something Marty and
Karen feel has been largely and sadly lost in most schools),
by having middle-schoolers work with younger kids both
in and out of the classroom, and
Meadowbrooks budget week in Paris, open to all eighthgraders who pass a French proficiency exam
The next step in creating a press package is to use their short
list as the framework to explain how Meadowbrooks unusual programs result in a top-quality learning experience. Marty and Karen
flesh out each of the items on their list and add supporting facts,
including how well Meadowbrook students score on standardized
tests and the high percentage who go on to succeed in high
school and college. Finally, they obtain favorable quotes about
Meadowbrook from prominent local educators.
When the materials are finally done, Marty and Karen send
them to Marybeth, the education reporter for the biggest area
newspaper. Marybeth is immediately interested in the highly unusual Latin program and wants more information about how and
why it helps Meadowbrook students develop superior language
skills. In fact, she concludes its such a novel approach she uses it
as the centerpiece for a very favorable feature story about
Meadowbrooks innovative but rigorous learning environment.
Within days, the school receives more new student applications
than there are slots available, allowing Marty and Karen to drop
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their proposed ads into the recycling box and spend the ad
money on repainting two classrooms.
Dont invite media scrutiny if you have

something to hide.
Unless your enterprise really is well run, media coverage is
not the best way of getting publicity. Because negative stories
sell just as many newspapers as positive ones, reporters
wont shy from printing or airing any not-so-glowing aspects
of your business. Also, before you invite the press in, give a
thought to your reputation in the community. As discussed
in Chapter 14, Embrace Your Best Competitors, reporters
are likely to check your business out with prominent people
in your field.
Figuring out how to get media coverage is only one way to get your
businesss name out without advertising. Here are some others.
Sponsor nonprofit activities. Supporting youth sports or arts groups,
as well as community-based health, education, or environmental activities,

to mention just a few possibilities, helps your business make friends. Often,
for a surprisingly small dollar amount, you can receive good publicity
from associating your business with a good cause at the same time you
and your employees feel positive about helping your community. For
example, when a deli sponsors Two Legs for Four Legs, an annual 10K
run with proceeds going to a local animal rescue center, many people in
the community hear about it.
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Participate in local events. Street fairs, cultural and historical
celebrations and parades, little league parades, and dozens of other

community activities afford you effective and fun ways to promote your
business. Encourage your employees to add a dash of creativity to the
usual plain-vanilla presentation and you can reach lots of people for a
low cost and have fun doing it.
Example:
Dr. Price, a childrens dentist, sponsors the Walruses, a local little
league team, whose symbol is, no surprise, a huge tusk. Each
year, when the Walruses are invited to march in the parade, Dr.
Price makes a huge plaster-of-Paris walrus tusk. The day before
the parade, the third-graders on his team decorate it, using paint,
sticky paper, colored band-aids and other fun stuff.
On the big morning, the tusk is placed on the bed of Dr.
Prices appropriately decorated pickup truck, which then leads the
team dressed in their walrus tusk team t-shirts in the parade. The
result is that the kids, as well as Dr. Price and his staff, who
supervise the decorating process, have a great time. And if, in
their march along Main Street, Dr. Price recruits a few new
patients, so much the better.
Become a source of trusted information. It can be an extremely
valuable business asset to be known as a source of high-quality unbiased
information. For example, a plumber, optician, or veterinarian who
publishes and updates a series of free handouts designed to help people
troubleshoot predictable problems and, if possible, solve them on their
own, will soon gain respect among customers, peers, and the local media.
This positive reputation will grow in direct proportion to how unbiased
the information is.
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Marketing to Your Target Audience

Whatever methods you decide on to promote your business, youve
obviously got to aim them in the right direction to get the maximum benefit.
To do that, you should first identify as many discrete groups of
potential customers as possible, then rank them with those most likely to
patronize your business at the top. (This process is explained in Chapter
7, Target Your Customers.) Youll not only want to concentrate your
marketing efforts on these top-ranked groups, but youll do best if you
feature the goods or services most in demand, not less-desirable products
you are trying to get rid of. For some types of businessesfor example, a
hardware store that sells to casual consumers, serious do-it-yourself
remodelers, and professional contractorsranking customers and the
products each group is most likely to purchase means engaging in a fairly
complicated, data-heavy process. For others, including consultants and
other businesspeople who provide a niche service to a relatively small
clientele, it will be easy to list the few groups of potential customers at
the center of the customer target.
Go with the winners.

Too many businesses, big and small, feature the wrong products
ones that used to do well, but are now fading, or items
someone mistakenly ordered too many of. Far better to
concentrate most of your marketing efforts on your biggest
winners, while dumping the losers at or below cost. Think of
it this wayits far easier to sell an extra 10,000 tickets to a
popular ball game than it is to sell 5,000 more when the last
place team is in town.
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Example:
Here is a marketing target for an accountant who specializes in
providing services to authors, musicians, inventors, and others
who sell intellectual property.
Once you have identified your most likely groups of customers and
what they are most likely to buy, you are ready to figure out how to reach
them as effectively as possible. If your universe is relatively small, as
would be the case for the accounting business discussed above, your best
approach is usually a personal marketing effort. For example, if a halfdozen agents represent most of the well-known authors in your area,
getting to know them personally and educating them about your expertise
would be a good start. After all, a prominent agent who appreciates that
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you understand all the tax ramifications of the many ways royalty deals
can be structured (and even better, if you are available to advise the agent
on structuring deals), is in a great position to recommend you to many
others. Similarly, local publishers and support groups for inventors,
musicians, and writers are excellent venues through which to get the
word out to many potential clients.
If your potential customer universe is both bigger and more diverse,
you will want to consider more public ways to market your goods or
services. Again, depending on the type of business, these might appropriately include:
Events. A sporting goods store sponsors a 10K run; a restaurant
heads an annual food-for-the-homeless drive.
Tie-ins. An orthodontist sponsors a kids soccer team; a plant
nursery becomes leads an effort to restore the towns neglected
rose garden.
Coupons. A music store works with a classical music radio station
to distribute discount coupons to listeners.
Free media. A general contractor who runs a house inspection
business self-publishes a small book and quarterly newsletter
explaining such topics as what to look for, how not to get ripped
off, and how to make needed repairs as frugally as possible. He
widely distributes these for free through local real estate offices,
lenders, and at several annual home-buyers fairs. This helps
establish his credentials with local media outlets, where he is
regularly interviewed and quoted.
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9
Hire and Keep Good People
I not only use all the brains I have, but all I can
borrow.
Woodrow Wilson
Use these techniques even if you dont

have employees.
If yours is a one-person business, you may be tempted to
skip this chapter. Please dont. Sole operators depend on
many personal relationshipswith suppliers, vendors, and
freelancersand the best techniques for working with these
people are very similar to the ones that successfully motivate
and manage employees.
highly competent and truly enthusiastic employee can be

at least three times more valuable than a person of average
skills. Yes, this is a huge difference, but its one we all recognize. Think for a moment about whose line you queue up in at your local
supermarket. If youre like me, you prefer being number four in the best
checkers line to being number two in the worst ones. And, of course, the
more skills and training a job requires, the greater the spread between the
work of an average and excellent employee. While it may be difficult for
the fastest checker to scan groceries at more than twice the speed of the
slowest, an excellent software designer, architect, or salesperson can perform many times better than a sub par performer. Of course, it follows
that to retain and motivate and star performers, you need to appropriately
reward them. Fortunately, you should have the economic wherewithal to
do so, since even if you double the pay of an employee who is several
times more productive than average, you still come out far ahead.
Your goal should be to hire and retain truly excellent employees
not reasonably competent ones. I know from experience why it is so
important to do this. Nolo has grown and thrived for almost 35 years in
large part because of the efforts of the capable, productive, and creative
employees we have attracted. There are several key reasons why we have
been able to assemble such an excellent staff. Certainly one of the biggest
is that people are drawn to Nolos mission to help people with legal
problems who cant afford or dont want to patronize lawyers. But at least
as important, Nolo has learned to do two key things. First, we follow a
thorough recruitment and hiring process designed to sift through many
applicants and pluck out the best people. And second, we pay lots of
attention to the positive management techniques designed to keep day-today workplace enthusiasm high and employee turnover low.
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HIRE AND KEEP GOOD PEOPLE
Nolo wasnt always good either at hiring or managing people in

ways that would help them succeed in our workplace. In our early years,
our employee recruitment practices were often haphazard and management nonexistent. Sometimes we hired the best friend or roommate of an
existing employee rather than searching for the best candidate. Often we
were lucky and hired wonderful people who, despite the lack of training,
figured out how to get the work done. But occasionally, we ended up
with a real dudsomeone whose poor work habits or lack of skills subtracted significantly from both Nolos overall productivity and our ongoing
feeling of group well-being. Clearly, our lives would have been easier and
our bank accounts fatter if we had learned earlier to hire smarter, manage
better, and to more quickly cut loose our disappointments.
Before getting into the details of how to create your own excellent
hiring and management processes that will net you a happy, hardworking,
and creative workforce, let me focus on several common hiring errors. For
some reason, hiring is an area where a great many new entrepreneurs
make exactly the same mistakes.
Dont Hire Casually

Too often, small business owners, hire friends, relatives, friends of friends
or sometimes even people whose main credential seems to be that they
are standing on the doorstep when another body is needed. Although
some of these people may make wonderful employees, youll almost
always do better to create and stick to a structured hiring process. If, after
careful background checking and consideration of all other candidates, a
friend, relative, or acquaintance emerges as the best choice, great. (More
on this in Avoid Nepotism, Not Relatives, below.) But dont make the
decision without clearheaded analysis.
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In fact, a huge advantage of establishing a well-thought-out hiring

system is that it helps you avoid being pressured into giving jobs to
problem relatives and friends. Once the word is out that your business is
hiring, all sorts of relatives, friends, and acquaintances are likely to beg
for jobs for themselves, for their kids, and sometimes even for an underperforming employee they are trying to get rid of with minimum guilt. If
you can honestly say that hiring decisions are made by a hiring committee
that has strict instructions to screen every candidate thoroughly, you may
not hear anything more from your angry niece Kathryn or your feckless
cousin Roger. Without such a system, all the dodging and weaving in the
world may not keep them off your payroll.
Example 1:
At a family gathering, you mention your decision to hire a financial manager. The next day your brother-in-law calls to forcefully
recommend his close friend Elizabeth. Ten minutes later Elizabeth
faxes her rsum and then calls to ask for a meeting. Since, at
least on paper, she has the qualifications you are looking for, you
agree to interview her. Impressed by Elizabeths energy and your
brother-in-laws thrice-repeated recommendation, you hire her
after making only a cursory check of her references. Only later do
you learn that Elizabeth (who your brother-in-law never tells you
he continued to date even after he met your sister) is in the throes
of a midlife emotional crisis and is about to be fired from her
present job because she has trouble getting along with other
employees.
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Finally, six months later, with your books in a mess and your
stress level off the charts (and the growing suspicion your sister
married an idiot), you fire Elizabeth. Alleging that you have not
reasonably accommodated her mental problems, Elizabeth
promptly calls a lawyer who threatens to sue you for violating the
Americans With Disabilities Act. Your own lawyer says that although
Elizabeth doesnt have a decent case, it will cost you at least
$25,000 to prove it. After much teeth-grinding, you accept his
recommendation to settle for $10,000.
Now lets take a look at this same scenario, but this time add a hiring
committee that has real power to make decisions.
Example 2:
When your brother-in-law calls to push his protg, you truthfully
reply that a hiring committee, not you, makes all the decisions
and that you never try to influence it based on personal considerations (you probably wont even need to admit that you are a
member of the committee). Now when Elizabeth calls, you
politely respond that you dont talk to candidates outside the
committee process. Elizabeth submits her application, as do half a
dozen other seemingly qualified candidates. When you conduct a
careful background check of each, several, including Elizabeth,
are eliminated. In her case, a phone call to a person your sales
manager knows, who worked with Elizabeth two jobs ago, is all it
takes to uncover the fact shes a high-maintenance employee.
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Avoid Nepotism, Not Relatives

Many business commentators advise against hiring any family members,
even when they are more qualified than nonrelatives. In my experience,
this approach makes little more sense than it does to hire every relative
who asks for a job. A significant number of small businesses wouldnt exist,
let alone thrive, without the positive energy, hard work, and sacrifices of
loyal family members.
What you do want to avoid is nepotismundue favoritism towards
relatives. That, of course, is not the same thing as hiring competent people
you happen to be related to and treating them fairly. And dont make the
mistake of thinking that when family members are hired favoritism is
inevitable. Often, just the opposite is true. Especially when a business is in
its start-up phase, its common for relatives to work harder for less pay
and benefits than do nonfamily employees.
To hire competent family members while avoiding the corrosive
effects of nepotism, separate the perks of ownership from those of
employment. That is, pay people who are related to you (and yourself)
exactly the same as you would anyone else doing the same job. Apply the
same evenhanded approach when setting schedules, assigning work, and
handing out criticism and praise. Take pains to be sure relatives are really
being paid and promoted fairly, not based on how close their branch is to
yours on the family tree.
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Dont Hire Problem Employees

In my experience, about one in 20 American workers comes straight from
hell and a like number hail from the same neighborhood. Other employers
may make a more or less charitable guesstimate, but anyone with workplaceor for that matter, humanexperience will surely agree that rotten
employees do exist, and that hiring even one to do an important job risks
poisoning your entire workplace.
In Anna Karenina, Tolstoy famously wrote, Happy families are all
alike; every unhappy family is unhappy in its own way. The same point
can be made about workplaces. Happy ones usually have much in common,
including high productivity, a shared sense of purpose, and a reservoir of
goodwill large enough to help your business skate over the inevitable
bumpy ice. On the other hand, a toxic relationship with even one key
employee can make your workplace miserable in myriad ways.
Rather than focusing on the many things bad employees may do
wronglying, stealing, intimidating others, doing poor work, and trying
to cover up mistakes come quickly to mindlets focus on how you can
avoid making bad hires. Youll make a great start if you simply avoid
hiring people in the following three categories.
People With Lots of Jobs in a Short Period

Especially for applicants in midlife, a history of frequent job changes is a
strong signal that you are considering an applicant you dont want to hire.
Every smart employer does two things: goes to great lengths to retain
bright, hard-working employees who get along well with others, and tries
to get rid of the misfits. It follows that people who have lots of jobs in a
short time are likely to have repeatedly proved themselves inadequate.
Sure, excellent employees do make career and job changes for good
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reason, but they rarely do it often. Most people who change jobs frequently
fall into one of five undesirable categories:
They do poor work. Often they put in long hoursoften overlong hours, but they simply dont have the discipline, focus, and
smarts to do a superior job.
They are chronically insecure. Often they fight needless turf
wars, trying to steal credit, shift blame, or otherwise needlessly
and endlessly pissing off their coworkers.
They steal or are otherwise highly irresponsible.
They are chronically unhappy (often because personal problems
lead them to seek something the workplace cant provide).
They have substance abuse problems.
People Who Come With a Qualified

Recommendation
As Im sure you know, every job applicant who has ever prepared a
rsum attempts to paint as positive a picture as possible. This usually
includes a list of respected people preparedand, frequently, even
rehearsedto provide a glowing recommendation. It follows that if a job
applicants former college teacher or ex-boss provides only faint praise,
something is almost always seriously wrong with the person. Often the
recommender is trying to avoid fibbing while at the same time trying to
be loyal to the applicant.
Listen closely to catch someone who overpraises an applicants few
good qualities while trying to avoid discussing others. It isnt always easy
to pick up on key omissions, but with practice and patience, your skills
should improve. Its a little like hearing the national anthem sung without
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one versesince you expect all the words to be there, you must pay
careful attention to notice that a few key ones are missing.
Another common technique employed by recommenders who know
a job applicant has serious weaknesses is to simply avoid directly answering a key question. For example, assume you ask, How did Tammy get
along with her coworkers? Instead of saying very well or mostly well,
perhaps with a short list of minor exceptions, suppose Tammys former
boss says, Tammy is a very bright person who cares so much about what
she does we actually found she did best when we gave her a lot of independence.
Cmon, it was a simple question. The fact that you got a politicians
non sequitur should tell you all you need to know about Tammys poor
interpersonal skills.
Also listen for someone who tries to put a positive spin on an
applicants negative quality. Say, in answer to the same question about
how well an applicant gets along with others, a former boss says, Joe is
an amazing self-starteran energetic person who regularly gets way out
in front of everyone else and can be impossible to catch. Again, pink, if
not red, flags should be flying. Its all too likely you are being politely
warned that Joe is a loose cannon who, despite having a load of energy
and good ideas, is difficult for others to work with.
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How to Ask Questions That Will Get

You Honest Answers
The more specific your questions, the more likely you are to get valuable
information. For example, instead of asking Was Betty a good employee?
you would do better to ask How exactly did Betty perform compared to
others doing the same work? Similarly, if you just ask How did Hector
do under pressure? youll want to follow up and request an example of
how the applicant coped with a specific urgent situation.
To make sure you get all the information you need from a person
who knows the applicant, prepare a list of ten or so questions. Some of
these, such as asking for the dates during which the applicant worked with
(or otherwise knew) the recommender, will always be the same. But
others should be modified to fit the job.
If, in the course of checking an applicants reference, you are told

something that seems just a little off, its up to you to follow up and ask
the tough questions necessary to get at the truth. Its my experience that if
I spot a missing or qualified part of a recommendation and politely insist
on being told the whole story, Ill get much, if not most, of it. Or put
another way, when pinned down, many recommenders wont lie.
Example:
Edna, just out of college, applied for a copywriting job with
QuickTime, a five-person ad shop. Gordon, QuickTimes owner,
called Francis, the college professor Edna listed as a personal reference on her rsum. Before Gordon could even ask a question,
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Francis, who seemed pressed for time, quickly said that Edna was
bright, intuitive, and a quick study and that he recommended her.
Only after a couple of other people at QuickTime read Ednas
rsum did someone spot that it had taken her more than six
years to graduate. Gordon again called Francis, but this time he
insisted on answers to a short list of focused questions, one of
which was, Why did it take Edna two years more than normal to
graduate? When Francis replied that for all her brilliance, Edna
sometimes had trouble meeting deadlines, Gordon decided she
would not be a good fit at a company that constantly faced them.
People You Dont Like

No matter how faithfully you check a potential employees educational
background, personal skills, personal history, and other key attributes, its
important to understand that the things you wont find out about the
person are likely to be at least as important as the things youll learn. It
follows that its always wise to pay attention to your gut reaction about
the personat the same time that you guard against discriminating against
people not like us. If you, or one of your key employees, have a good
reason for experiencing strong doubts about a supposedly diamondencrusted applicant, its best to keep interviewing.
How to Hire Top People

Enough worrying about how to avoid mistakes. How do you actually go
about hiring excellent employees you can afford? Start by fully accepting
the fact that consistently hiring well is a disciplined process with few
shortcuts. It usually involves at least seven steps.
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Define the Skills You Need

Whether you want to hire someone to set up and run a website, write
press releases, clean up hazardous chemicals, restore furniture, or make
sandwiches, you need to clearly define the skill set you are looking for.
For example, writing compelling press releases requires a person with
excellent English composition skills and an understanding of marketing.
Its not a job where you want a good salesperson who doesnt know the
difference between a comma and a semicolonor an English major who
has no concept of how to pitch an idea. Similarly, if you run a sandwich
shop that is super-busy two hours a day, you need sandwich makers who
can do a good job super fast. Someone who sees each sandwich as a
work of art that must be deliberately put together and presented will be
of use to you only if she works for a competitor.
Establish Your Pay and Benefits Package

Its a waste of time to interview people until you have established or
announced an appropriate pay range and a list of benefits, and are prepared to answer potential employees questions about the possibilities for
advancement. If you are casual about any aspect of this crucial step, youll
almost always waste time by interviewing people you cant afford to hire,
or worse, agree to pay an applicant more than you need to. And remember,
as discussed above, paying highly productive people well normally saves
money in the long run.
Find the People Who You Dont Have to Train

Your goal is to match productive employees to needed tasks as closely as
possible, not necessarily to hire brilliant people. The fact that a potential
employee graduated from an Ivy League college, has composed a sonata,
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or understands knot theory is irrelevant if you want someone to manage a

store, sell furniture, or repair computers. And although larger businesses
can afford to train inexperienced workers, you dont have this luxury.
Your goal should be to hire people who already know how to do the job.
Even if you had time to train people from scratch, it would rarely be
a good use of your time. Especially when your business is new, you will
personally have to cope with far too many tasks you are ill-equipped to
accomplish efficiently. Depending on the field you are in, you may need
to choose and order inventory, deal with key customers, keep the books,
make sure the quality of your product or service remains high, and do a
dozen other things. Unless Clark Kent is your cousin and will lend you his
blue and yellow suit, you are unlikely to have the ability or temperament
to do all this work well, which also means youll be ill-equipped to teach
others. I know I still feel sorry for people who received boxes of books I
packed during Nolos first year, and even worse for those whose orders
were packed by the well-meaning but memory-challenged high school
student I hired and tried to train to replace me. But if, instead of simply
hiring a warm body, you replace yourself with a person who already knows
how to competently perform the needed task, your business should
quickly become more productive.
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Hire people who can handle the job on

their first day.
In Nolos early days, I frequently made the mistake of hiring
intelligent people not trained for the tasks I was asking them
to do. I assumed that because the job didnt seem all that
hard, they would quickly learn while they worked. Mostly
they didnt. Gradually I learned that in the absence of a wellthought-out training and mentoring program, its a mistake
to assume an inexperienced employee will quickly and efficiently figure out how to do a new task. Only when I finally
began to insist that new hires be able to do their job from
day one, did Nolos productivity begin to increase.
To find superior people for a decent but still affordable salary, start
by identifying appropriate groups of high-quality employees others may
overlook. If you dont, youll usually find yourself sifting through the
people left over after more established and better-funded enterprises have
done their hiring. Here are several groups in which you may find excellent,
affordable employees.
People who have been recently laid off by high-quality employers.
When large corporations downsize or move jobs overseas, they
often cut big groups of workers with little attention to individual
competence. At least some of these well-trained, often wellconnected folks will be open to finding steady work in the small
business sector, even at reduced pay. For example, a salesperson
who represented a major player in your field and got to know
buyers at a number of major accounts could be a godsend for
your niche start-up. So when you hear about mass layoffs at a
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big local company, quickly fax your job announcement to their

human resources department. You could get very lucky.
People who need a flexible work schedule. Parents with child
care responsibilities, people who care for aged parents, part-time
students, and part-time retirees are among the many people looking for time-flexible employment. For example, Nolo employs
many highly skilled lawyers whose commitment to raising their
young children means they are unwilling to cope with the bigfirm rat race. Many larger businesses cant or wont bend their
rigid work rules to accommodate these people; if you can, youll
increase your chances of hiring a top-notch person at a reasonable salary. Listing our legal jobs at college placement offices and
with parent-support organizations are among the best ways to
reach these highly skilled job seekers.
Recent immigrants who are learning English or speak with an
accent. Look especially for people who have a strong educational
background or good on-the-job training in their native country.
Nonprofit groups that work with immigrants are often an excellent
source of referrals.
People with the skill to do the job, but without the formal
education or professional certifications typically required. For
example, at Nolo we need editors with excellent writing skills
who are knowledgeable about the legal system. Some of these
people have active law licenses, but since we dont deliver
individualized legal advice, this isnt essential. We can increase
our applicant pool by considering people who are knowledgeable about the law but who have not passed a bar examination
for example, a consumer educator or experienced paralegal.
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Give All Candidates a Practical Test

If youre hiring a store clerk, you need someone who can quickly and
competently operate your pay-point cash and credit systems. If youre a
delivery person, you need a driver who can safely operate your truck and
navigate through the area you serve.
At Nolo, we have developed skills tests for a number of our jobs. For
example, two experienced legal editors treat every editorial department
application as if it were a formal test. They grade each letter and rsum
for clarity, organization, and grammar. Only if the applicant scores well
do we move on to the next stage, which involves asking the person to
come to Nolo to take a more formal test, which usually consists of editing
a couple of pages of garbled syntax. Similarly, people who will check
over computer code are asked to sit down at a computer and swat some
bugs. Occasionally the person who comes across best at an interview also
does best when confronted with the real tasks to be done but, at least as
often, a less verbal person shines. If you dont thoroughly test job applicants, you may end up hiring the talkers, not the doers.
Check References and Nonreferences

It is essential to talk to people who know the applicants work, but are
not listed on his or her rsum. Fortunately, finding these folks can be
surprisingly easy. Look carefully at where the applicant has worked,
volunteered, or gone to school, and think about who you know who
might have known the applicant in one of these places. If you cant come
up with a direct connection, think about people in your extended business
or social network who might be able to help. More often than not, the
folk wisdom that holds everyone in the U.S. is linked by no more than
three phone calls turns out to be true.
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Dont set much store by what a current employer says. In an age when
many employers are terrified to fire problem employees, lest they be sued,
it has become popular to get rid of even the rottenest of apples by helping
them find a new job. To do this, many employers provide sub par and
even some terrible workers with positive references. This explains why its
usually not only a waste of timebut often counterproductiveto talk to
anyone in authority at a company where a job applicant currently works.
Youre far more likely to get an unvarnished story by talking to a previous
employer, who is far less likely to be motivated to shade the truth.
Of course, there are exceptions to the rule. For example, when a job
applicant leaves a job for an obviously good reason, such as to move
across country with a spouse or as part of a major career change, a current
employer may give the straight scoop. But even then youll want to get a
second and third opinion, preferably from people not listed on the
applicants rsum.
Example:
John plans to open a company to refurbish museum-quality antiques.
To succeed, he needs an experienced sales manager who can
work easily with his anticipated clientele of collectors, gallery
owners, and museum curators. After listing the job in several
industry publications, John gets an application from Evie, a woman
with both an MBA and ten years sales experience at a prominent
auction house specializing in antiques. Concerned only that Evie
seems almost too perfect to be true, John remembers that Jos, a
business acquaintance, used to work for the auction company.
Jos, it turns out, doesnt know Evie, but offers to call Ann, an
executive at the auction company, who does. When Ann whispers
that Evie is great on the days she is sober, John sensibly decides
to keep looking.
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Include Coworkers in Interviews

People who will work closely with a job applicant have as big a stake in
detecting and eliminating slackers as you do. Whether your business is
fixing cars, publishing a newsletter, or selling salami, make sure that at
least some of the people who will work with your new hire participate in
the interview process. Employees who have participated in selecting a
new employee are far more motivated to work well with that person than
with a new person who suddenly parachutes into their work group from
on high.
Learn from job applicants.

No question, interviewing a number of job applicants can be
an exhausting task. One way to make it better is to assume
that at least some of the applicants have information or skills
you or your company doesnt have. Structure your interview
to bring this information to the surface, and you may be
pleasantly surprised to find that even some job applicants
you dont hire can teach you how to improve your business.
Schedule an Early Review

For all but the most senior jobs, youll want to make it clear that the
employee will receive an evaluation after the first 30 to 90 days of work.
If someone turns out not to be a good fit, its far easier to make a change
early on rather than after the person has settled in. But if you adopt this
approach, do not describe the employee as temporary or probationary,
since this might imply that the person attains the right to long-term, if not
lifetime, employment after the initial period is over.
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Know and follow employment law.

Federal and state laws prohibit discrimination against job
seekers and employees for many reasons, including race,
religion, natural origin, age, and sex. This is as it should be.
But employment laws also contain needless technicalities that
can easily trip the honest but unwary. For example, if you ask
for an applicants college graduation date, you have probably
violated age discrimination laws, since this can be seen as a
stealthy way to determine the persons age. Fortunately, its
relatively easy to learn how to stay out of trouble by understanding and adopting good hiring and employee management
practices. The Employers Legal Handbook, by Fred S. Steingold
(Nolo), is an excellent primer for small business owners. Also
check out the free information in the employment section of
Nolos online legal encyclopedia at www.nolo.com.
Keeping the Great People You Hire

If youve got a boring, poorly organized, or joyless workplace, dont
bother trying to hire highly talented, energetic, and productive people
they wont stay long. In fact, hiring them may even be counterproductive
if they defect to a competitor or start their own competing businesses.
Even laying aside these fears, you dont want to lose experienced
employees. Just as it will take many small business owners three to five
years to really hit their stride, top-notch employees, even those who can
do skilled work from their first day, will become more valuable every
month they work for you. Not only does building a veteran workforce
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mean youll get more mistake-free work done, but each of your long-term
workers will build a valuable mental database of useful information about
your products or services, customers, coworkers, and suppliers. As long
as these people continue in your employ, this knowledge remains at your
service. If they move on, you lose everything they know.
For example, at Nolo we hire legal editors, most of them lawyers who
can explain legal rules in plain English (a rare combination, admittedly),
to edit and often write our new titles. Even though we use a rigorous
screening and testing process to hire highly skilled people who can
immediately do good work, weve found that, on average, it takes about
18 months before a new editor can do the job without at least some
mentoring from a more senior editor. And it typically takes even longer
for a new editor to gain enough knowledge about a wide range of Nolo
products to fully catch up with their more experienced peers. It follows
that Nolo has a huge interest in hanging on to people who go through
this extended apprenticeship.
To fully appreciate how valuable it is to keep good employees for as
long as possible, think about your own relationships with local businesses. If you are like me, you enjoy dealing with the same competent
people year after year, and can become frustrated when familiar faces (or
even familiar voices) are replaced by new ones. Its no fun to deal with
someone who is obviously learning on the job. More than once Ive gone
elsewhere when I realized that, as a longtime customer, I knew more
about the task than the poorly trained novice employee who was trying to
do it.
So how do you go about keeping an extremely productive employee
working for you as long as possible? At a time when most Americans will
have many jobs during their working lives, the key is to focus on the
words as long as possible. For example, if you run a take-out food
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business, you may achieve a real victory if you keep the college kids who
work the counter and drive the delivery vans for a year. On the other
hand, you may be able to hang on to your bookkeeper and night manager
for a decade or more. The point is that if you can keep the best shorttermers for a year or two instead of six months and provide a career path
that will keep top-notch long-termers loyal for many years, youll get a
huge gain in productivity.
Treatand PayPeople Fairly

Fairness is the best one-word prescription for keeping employees loyal
to your business. Workers who believe your business can be trusted to
treat them equitably are likely to be loyal; those who feel they are in
untrustworthy hands are almost sure to move on. Thus the absolute size
of a persons pay packet will have less to do with loyalty, than will their
subjective belief that are being compensated fairly. This explains why
investment bankers, corporate lawyers, and executives who make six- or
even seven-figure salaries are at least as likely to quit in a huff as is a
truck driver, tile layer, or office worker.
And, of course, it isnt only money thats important to retain good
workers. Its also critical to establish and follow a set of employment
policies that are understandable, consistent, evenhanded, and which,
above all, your employees regard as being fair. What do I mean by fair?
Basically, that your business uses objective criterianot your whim or
piqueto hand out rewards and punishments. For example, if you
promote your lazy cousin over a long-term, experienced employee, you
risk convincing everyone in the company that you cant be trusted to be
equitable. But if you adopt a merit-based system of promotion and stick
to it, even though it means your cousin doesnt get the promotion (and
may even be laid off), you go far towards reassuring all employees that
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they will be treated fairly. True, your aunt may snub you at the next
family gathering, but thats a price youll have to pay to run a business
your employees will respect.
When it comes to pay, employees normally use three key factors to
judge whether they are being fairly treated:
How much similar jobs in your area pay. Especially for highly
productive people who receive $10 to $12 per hour or less, its
essential to pay more than your competitors do. If you dont, those
penny-conscious employees are sure to feel slighted and move
on, with the predictable result that youll quickly be left with a
stable of the slow, difficult, and depressed. Unfortunately, most
small employers never grasp this lesson. Thus in most businesses
the sales clerk who works twice as fast as the norm gets the same
pay as the others. Again, as emphasized at the beginning of this
chapter, its far better for employee retention, overall productivity,
and workplace happiness to significantly raise the pay of your
most productive employee and look to hire more like her.
How much others with comparable skills are paid in your
company. Your employees will have no trouble accepting substantial pay disparities as long as in their eyes they reflect real
differences in skill, training, seniority, and job responsibilities.
But dissatisfaction will quickly surface if employees conclude that
one person or group receives substantially better pay or perks for
no honest reasonor worse, for a bad reason. This is not the
place to tackle the details of complicated pay equity issues, such
as differing pay rates for different departments, individual vs.
across-the-board raises, and overtime for some job categories and
not others. But it is important to grasp just how essential it is
even for employers with just a handful of employees to create
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logical, understandable, and defensible pay policies and modify

them only when objective new factors require it.
How much the bosss pay and perks are. As I discuss in detail in
Chapter 10, Drive a Modest Car, even if your business becomes
highly successful, its important that you not offend your employees
by showering yourself with money and perks. True, you can try
to pay yourself lavishly and try to keep it secret, but unless you
are married to your bookkeeper, it wont be easy.
Purpose
As discussed in detail in Chapter 1, successful small businesses are almost
always imbued with a sense of purpose. Their owners understand and
respect the fact that most of their employees and contractors yearn to find
meaning in their work. There are several tried-and-true methods to help
your employees believe in the value of their work. But no amount of
cheerleading will work unless your employees believe you really do run a
high-quality operation. For example, if you claim your caf serves the
freshest baked goods in town but your employees know you occasionally
slip a few day-old muffins in with todays batch, youll need to change
your ways before youll get any traction trying to convince them your
business is special.
But assuming you do run a quality operation, helping your employees
create and participate in a larger vision will go far towards cementing
their loyalty. Im reminded of a veterinarian who not only ran the cleanest,
most efficient animal care operation in town, but also carved out the hours
necessary to allow employees to participate in a variety of free animal
rescue and support activities. As a result of this altruism, the vet attracted a
terrific crew of animal-loving employees, people who were so pleased to
be part of a committed business that many of them stuck around for years.
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You may be thinking that while your business is meaningful to you,

it doesnt have an obvious and easy-to-communicate larger purpose. Nonsense. Just as its up to you to create a superior business along the lines
discussed in Chapter 1, Build a Meaningful Business, its your job to help
all your employees see that their individual roles are important. Whether
you run a gas station, flower stand, or a gene-splicing boutique makes no
difference as long as you communicate your sense of purpose to the
people you work with. Here are some examples of how this can be done.
A small manufacturer that hand-makes custom wooden windows
using only the highest grades of wood and the best woodworking
techniques teaches its employees how to educate customers as to
why this results in a far better, more long-lasting product than
can be purchased at a big box building supply store. To this end,
the company develops a video showing employees carefully
making the windows and before-and-after shots of installations.
A business that imports large glazed clay planters from Thailand
all but adopts the Thai villagers who make the pots. Not only do
customers learn where and how the planters are made, they have
a chance to make a small contribution to a fund to benefit the
village school where workers kids are educated. Although the
company itself makes the largest contribution to the fund, it is
administered by employee volunteers on their own time. Each
year the business pays the most senior employee who hasnt
already made the trip to go to Thailand and spend a week hanging out with the pot makers.
A real estate broker not only helps people buy and sell their
houses, but encourages its agents and employees to take time to
help buyers get acclimated to their new neighborhood. Among
the businesss initiatives is a get-to-know-the-neighborhood
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booklet (also available online) in which employees tell newcomers their favorite places to shop, recreate, and play. One
feature that often draws critical acclaim is called How to spend a
perfect day within a few miles of home.
A neighborhood restaurant not only serves an innovative breakfast and lunch menu, but publishes a small cookbook containing
100 favorite meals. The book, created with input from employees
(and containing plenty of pictures of the whole crew), is sold
both at the restaurant and at several local bookshops. With costs
of production underwritten by the restaurant, all profits go to
purchase food for the homeless.
A local body and fender shop works in a variety of ways to
promote auto safety. Each year the garage runs a raffle to raise
money for a safe driving course taught at a local high school and
several senior centers. Several employees of the garage who have
been appropriately trained are given paid time off to help give
the courses.
Mentor New Employees

Some businesses do almost everything right during the hiring process:
they reach out to good people, interview them, screen them, test them,
and hire them. And then, after some cursory training, they assume that the
new employee knows all aspects of the job. Especially if you follow my
advice and hire a skilled person, this approach can work, after a fashion.
But a sink-or-swim philosophy can also leave new hires feeling adrift.
Thinking that they are expected to be fully competent in all aspects of the
job, they may be hesitant to ask questions, and as a result be prone to
making mistakes. They may also feel that the company doesnt care much
about their personal growth or their contribution to the business.
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You can avoid or at least reduce these problems by making sure that
every new employeeno matter how experiencedhas a mentor, someone who helps guide the new persons development within the company.
A mentor isnt necessarily a supervisor, but should pay attention to both
the new hires progress and any problems that crop up.
Mentoring doesnt have to be a formal process, as long as an experienced person is asked to look after the new employee. It can be a great
help with making sure that new hires are comfortable in the company and
get the training and feedback they need to do a good job.
Making people welcome and comfortable is more important than you
might think. Although you probably regard your small business as a
friendly place, its probably also a very busy one, where employees dont
always have time to reach out to new folks. Thats why its so valuable to
have a mentor who can answer questions, provide background about
how the business works (institutional knowledge), and see that the new
employee is getting the tools, time, and information necessary to do the
job.
Good training is all about the employee,

not all about the employer.
At Nolo we believe its our job to help every employee
improve her skills to the point that should she ever leave us
to find a new job, shell be prepared to take a step up. One
way we do this is to have everyone who trains a new
employee keep the focus on the trainee. Do this by having
the trainer ask, What does the new person need to learn,
not what do I need to teach?
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Appreciate Your Employees

Its simple, really: Employees strive to do even better when they know
their hard work and creative contributions are noticed. Those whose good
work isnt acknowledged are likely to look for jobs where they feel their
efforts will be better appreciated.
Whether you have 5, 55 or 105 employees, I strongly encourage you
to develop your own employee appreciation program. But to make sure
your program really will be welcomed by your employees, its best to create it with their input. If you dont, you risk adopting a plan that will be
ignored or, far worse, resentedfor example, if your well-meaning plan
to recognize creative work by paying bonuses is seen as a cynical ploy to
make your overworked employees put in extra hours.
Example:
Jan decided that a great way to reward hard work and increase
sales was to create a salesperson-of-the-quarter award, with the
winner getting a trip for two to Hawaii. Consulting no one, she
called a company meeting and proudly announced the detailed
rules of this new program. Too bad that Jan hadnt realized that
the rules she announced favored the three salespeople with the
best territories, and in consequence angered several others who
worked in less productive areas and saw the whole program as a
backhanded way to tell them they werent producing enough.
Even worse, Jan didnt create a parallel award for the office staff
and other support personnel who processed the orders, shipped
the goods, collected the bills, and did other essential work to
allow the sales staff to succeed.
Fortunately for Jan, a longtime employee soon marched into
her office to forcefully explain that everyone, save the three
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already highly compensated salespeople, was offended by her

plan. Reluctantly acknowledging her mistake, Jan cancelled the
program after the first three months and set up an employee
committee to recommend a way to use the same amount of bonus
money to provide incentives to everyone. To Jans surprise, the
committee proposed that whenever the entire business exceeded
its quarterly sales goal, $1,500 would be used for a dinner party at
a nice restaurant to which everyone in the company and their
spouses or significant others would be invited. These events
turned out to be so welcome that everyone, from the senior
employees to the high school kid who helped with filing, began
paying close attention to weekly sales totals.
In addition to involving your employees in helping you create appropriate ways to appreciate them, let me suggest a second principle that has
served Nolo well. When thanking people for good work, be as inclusive
as possible. Dont recognize or reward just the most visible person or
even the person who has led a particular effort. Acknowledge everyone
who contributed to the good work you are recognizing and honoring. For
instance, in the example above, the thing that really made Jans reward
program fun was that it included everyone, even the high school kid, who
proudly brought the boyfriend she normally complained about.
Finally, its best to keep your appreciation efforts simple and sincere.
Often a public thank-you at a company meeting or via email, or a nice
lunch with a key person or small group is more welcome than a chance
to participate in a more complicated rewards program. A big reason for
this is that many rewards programs are designed (or at least are perceived
to be designed) to influence or even manipulate employees future
behavior, rather than to simply acknowledge their good work. While crafting clever incentive plans to coax employees to work harder or smarter
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may occasionally work, they are just plain awful ways to recognize and
appreciate good work. Just think about how good you feel if a spouse or
friend says something like, Thanks for cooking such a great mealI
really appreciated it. And how you would feel if the same person said,
You know, if you would just cook this well for the next two weeks, Id
take you out to dinner.
Further reading on rewarding employees

for good work.
A number of publications contain good ideas on how to
recognize employees good work. One I like, 1001 Ways to
Reward Employees, by Bob Nelson (Workman), provides a
comprehensive list of awards, rewards, and other techniques
to let employees know that their contributions are
important. While few of them will fit your business exactly,
reading this little book should jump-start your thinking.
Have Fun
Not enough businesses encourage their employees to enjoy themselves.
Some sobersided owners simply dont understand the value of creating an
environment where employees have permission to enjoy themselves. Its
as if they really believe the old saying, If work was supposed to be fun,
it wouldnt be called work. Other entrepreneurs act as if they believe fun
is subversive and will undermine productivity.
To cut through this neo-Puritanism and quickly understand how
actually encouraging workers to enjoy themselves can be a powerful
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motivator, consider Southwest Airlines, which in most years is the worlds

most profitable air carrier. In addition to charging low prices and providing
reliable, if somewhat spartan services, Southwest is surely the worlds
largest corporation that actually encourages its employees to enjoy
themselves. Cabin attendants tell jokes, ticket agents dress up in holiday
costumes, and even pilots have been known to tell one-liners. How effective is this unique company culture? Almost alone among all the worlds
major airlines, which are constantly beset by strike threats from angry
unions, Southwest enjoys relatively harmonious relations with its employees.
And its customers are so loyal it was the only large U.S.-based airline not
to reduce flights after the horrors of September 2001.
Just how well Southwests work-with-a-smile policy works to create a
positive bond with both customers and employees came home to me a
couple of years ago when I happened to fly Southwest on Halloween.
Entering the Albuquerque, New Mexico, airport, early that morning, I
walked past half a dozen other airline counters to get to Southwest. Several
ignored the day entirely, while others displayed a sparse sprinkling of
tacky dime-store decorations. United, for example, could muster only cutouts of three pumpkins, one ghost and two mangy black cats that looked
like they had been stuffed into a closet since last year. My five-year-old
grandkid could have done better in half an hour.
Then, towards the end of the row of counters, I spotted a cornucopia
of color and creativity totally transforming the ticketing area. Although the
sign was partially covered by a huge pumpkin, I knew it had to be Southwest. And not only were walls overflowing with handcrafted displays,
behind the counter everyone was decked out in colorful costumes.
As you might expect, Southwests employees dressed as Elvis, Captain
Hook, and Diana Ross were enjoying a high-spirited morning, a feeling
that was immediately transferred to their customers. Instead of looking
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anxious and impatient, customers in line were smiling, pointing, and talking
to each other. And when they finally got to the front of the line to check
their bags, everyone had something nice to say to the people behind the
counter. A few minutes later, as I walked smiling and almost relaxed
towards my plane, I understood once again why Southwests decision to
encourage its employees to do their jobs seriously and well, but also to
enjoy themselves at work, is one important reason why it is so successful.
Okay, Im sure you get my point that fun and enthusiasm will increase
productivity, not subtract from it. But even if no more widgets are made,
or whatchamacallits sold, encouraging people to smile can help create
camaraderie and long-term loyalty to your business that are all but impossible to replicate in other ways.
Since workplace environments vary so much, no one can give you a
100% effective list of ways to encourage employees to enjoy themselves.
But fortunately, writing a prescription for fun isnt necessary. All you need
do is send the occasional message its okay for employees to enjoy themselves, and then get out of the way and let it happen. Often the best way
to do this is to loosen up a bit yourself. For example, if on St. Patricks
Day, you come to work dressed as a leprechaun, people will likely get
the idea.
Here are a few of the things that Ive found work to establish an upbeat workplace tone. Like many smart approaches to life, many are as
simple as they are commonsensical.
Food. Sharing food is probably the most basic way to build community.
If you occasionally bring in some treats (homemade is best), others will,
too. Be sure that when this happens everyone in your business has a few
minutes to enjoy the gift. If this means that you sometimes spell the
person who answers the phone, do it with a smile.
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Birthdays. Families celebrate one anothers important milestones.
Businesses smart enough to treat the people who work for them as part of
a workplace family do, too. Keep a calendar of employee birthdays and
remember to do a few little things (balloons and a cake may be corny,
but they always work) to honor the birthday person. In businesses with
more than a dozen employees, combine birthdays and have one party
every month or two.
Hats, shirts, and other tchotchkes. At Nolo we have a long tradition
of occasionally giving our employees Nolo t-shirts, baseball caps, coffee

mugs, and other little gifts. (Our Dont Feed the Lawyers t-shirt has
become so popular weve also sold over a thousand in our retail store.)
Recently, we distributed press-on tattoos featuring our logo shark. Everyonemost especially our younger employeeswas delighted.
Youre doing fine if employees wear their

company shirt.
I can pretty well judge the mood at Nolo by how many of
our employees voluntarily choose to wear the Nolo logo
shirts, caps, vests, and other paraphernalia we periodically
pass out. If I dont see many for a week or two, I know
something is bothering people.
Wall decorations. Taking the trouble to put framed prints or other
tasteful decorations on the walls is a great way to tell both employees and
customers that you take pride in your workplace. This costs very few
dollars, but is well worth it in many ways. For example, if an impressed
visitor tells your employee, Wow, its really nice here, youre lucky to
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work in such a cool place, obviously you have received a huge dividend
on your investment.
Parties and picnics. Now and then its a great morale-builder to invite
everyone to a fun off-site party or other social event. There are many ways
to do this, from the ubiquitous summer picnic and winter holiday party to
all sorts of less-usual events. For example, at Nolo we usually hold an
annual Play Day. We close the entire business for a day and all go to a
local park to hang out with each other (no spouses or kids are allowed).
A committee of employees helps design the days activities. Often each
Nolo department comes up with a wacky game for everyone to play. For
example, our design group might divide the rest of the company into
eight teams, giving each a pile of objects including colored paper, string,
glue, a couple of vegetables, and a golf ball. Each group is then given ten
minutes to create the funniest book cover. Of course, there are silly prizes
for the winners.
Other popular Nolo events have included the Pet Parade. Held in
the parking lot as part of a lunchtime potluck, everyone is invited to show

off their willing pets, from dogs to doves and cats to iguanas. Of course,
there are many goofy prizes for stupid pet tricks, pets that look most like
their owner, and so on. One year, my three-legged tortoise won a prize
for taking the longest to jump over a three foot barrier. (We waited ten
minutes before saying what the hell and awarding the prize.)
And our famous No-Talent Show. Like many businesses, Nolo has
talented painters and filmmakers working in our warehouse, musicians in

customer service and accounting, and dancers in the marketing department.
For fun, though, we prefer to occasionally level the playing field and
encourage every ham in the company to participate in our No-Talent
Show. Last time, a big favorite was a chorus line of body-part wigglers
employees who could twitch ears and noses, and turn double joints inside
out.
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Im sure you get the idea, so I will spare you the details of our
Halloween party, holiday gift exchange, and other events, some of the
best of which are spontaneous.
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10
Drive a Modest Car
Success has made failures of many men.

Cindy Adams
n a small business, where you and your employees will almost

inevitably work together, you have a choice: Conduct yourself as a
team player who demonstrates respect for the judgment of coworkers
and leads by example, or as the big boss who rules by edict and doesnt
pull a fair share of the load. Its my strong belief that everyone associated
with your enterprise will be happier and your business more productive if
you adopt the posture of leader, not dominator. Without attempting to list
all the psychological reasons why this is true, it should be enough to
point out that American traditions are democratic and majoritarian, not
autocratic and imperious. At all levels of our society, leaders who work
hard and are in touch with ordinary people command loyalty and respect.
Those who dress up in a fancy uniform and mount a white horse often
find themselves riding alone.
Drive a Modest Car

In the United States, the formal class structures common even in other
affluent nations are absent, and even the rich claim to be part of the
middle class. But many affluent people buy expensive things they dont
need in part to signal that they are nevertheless somehow above the herd.
And the more luxuries they flaunt, the more it annoys many of those who
are less affluent. This desire to one-up the Joneses is so much a part of
our national psyche that advertisers repeatedly depict the smug suburban
homeowner who purchases a new car, snowblower or, even better, grass
seed and then sits back to watch the neighbors seethe with envy.
Exaggerated? Certainly, but nevertheless we all notice the kind of cars our
friends (and especially our foes) drive, how fancy their houses are, and
whether they adorn themselves with expensive clothing and jewelry.
It isnt just social acquaintances who judge each other by their
possessions. For better or worse, your employees, suppliers, and even
your customers will also pay close attention to the goods and toys with
which you surround yourself. And again, given Americas deep puritan
and egalitarian roots, the more ostentatious you are, the more harshly
they are likely to judge you. Should you doubt this, ask yourself which of
the two business owners briefly profiled below is more likely to be
popular with coworkers:
Fred. Flies first class, drives a big Mercedes, wears a $3,000
watch, and owns lots of flashy electronic toys and top-of-the-line
sports equipment. Fred always eats at pricey restaurants and
makes no secret of his stock market successes and how much he
spends on exotic vacations.
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Fredericka. Flies coach, drives a Honda Accord, wears a sensible

watch and wedding band, and plays golf at the local public links.
Fredericka eats wherever the food tastes good, sometimes leaves
work an hour early to volunteer with one of several community
organizations she is involved with, and keeps both her investment
successes and how much she spends on her holidays to herself.
If your answer is Fred, go buy that 12-cylinder Jaguar you have been
lusting for and skip the rest of this chapter. If you work very hard at your
business, treat your employees well, and have a bit of luck, you may
overcome the seeds of resentment your showy behavior is sure to
engender. But, if you prefer Fredericka, youre already on the right track
towards understanding why it makes sense in the workplace, at least, to
curb your more ostentatious habits.
Now lets add a few facts. Assume that Fredericka takes home a
larger paycheck than Fred does, and that she quietly spends some of her
money on luxuriesa second home in the mountains, foreign travel and
a rare book collection. Who wins the popularity contest now? Again, of
course, its Fredericka, something that wont change as long as Fred drives
that big Benz and brags about buying Microsoft in 89. Point made, I
hope, that its conspicuous consumptionnot financial successthat
rankles.
One morning when this book was about to go to press, I opened the
newspaper and a prominent headline jumped out at me from the first
page of the second section: S.F. schools chief treats herself to sporty
$33,000 Chrysler. The story detailed how the superintendent of San
Francisco schools had just bought, at school district expense, a brand-new
sports sedan. She described it as middle of the roadbut the article also
quoted the proud car salesman, who said the car was as loaded as you
can get with fancy options. The story then went on to note that the heat
had recently been out at a San Francisco elementary school for a month.
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The superintendents large salary ($200,000 plus) hadnt been newsworthy.

But her car, complete with a detailed description of its leather upholstery,
sunroof, and other goodies, was. Just imagine which page the story would
have run on had the superintendent bought a $50,000 car at taxpayers
expense.
If you still doubt the huge negative message your ostentatious
behavior can have on your employees, walk around any business park or
commercial neighborhood until you find a perfectly detailed, new luxury
car in a reserved parking spot next to the front door. (Given the large
percentage of self-important business owners, this shouldnt take long.)
Hang around for a few minutes until an office or service worker enters or
leaves the building, and say something like, Cool car, huh? Chances are
good the person will shrug and make a sour comment about the boss.
And why not? Its no fun to work for someone whose car cost three times
your yearly pay.
Employee disdain for a bosss flaunting of wealth can manifest itself
in many ways. For example, a number of years ago I sold a small business
to a woman (lets call her Jane), part for cash and part for a promissory
note to be paid off in monthly installments. When neither the May 1st
check nor an explanation appeared by midmonth, I called Jane, only to
be told she was out of the office. When a second call was similarly fruitless, it began to dawn on me that I might have a collection problem. But
since I had enjoyed decent relations with Jane in the past, I was not yet
ready to adopt an aggressive pay me now or Ill repossess your desk
posture. That quickly changed when I received a surprise call from Ellie,
Janes secretary, who said, I know I shouldnt tell you this, but Jane cant
pay you because she took money out of the business account to redo her
Mercedesshe got a new paint job, expensive tires, new leather, the
works. It set her back $6,000. Thats the real reason why she wont take
your calls.
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When I investigated, I learned that Janes divorce and child custody

battle had taken a turn for the worse and she simply wasnt able to concentrate on running the business. Apparently she had spent the money
she owed me on her car to try to cheer herself up. Acting quicklyand
with Janes somewhat reluctant agreementI was able to take back the
business and resell it while it still had considerable value, giving an
appropriate amount of the receipts to Jane to reflect her ownership interest.
But for Ellies call, I probably would have wasted months trying to cajole
Jane to pay up, time during which the value of the business would have
surely declined. Ive always wondered if Ellie would have tipped me off if
Jane had spruced up a Honda or Ford.
When Jerry Brown was governor of California, he insisted on driving
an old Plymouth and living in a budget apartment instead of the governors
mansion. Similarly, a few business owners go to extreme lengths to
demonstrate their humility. This is overkill. There is no need to buy your
clothes at The Goodwill Store, work in a broom closet, and drive a used
Kia to send the people you work with the message that you arent a
spoiled brat. Like the citizens of California, many of whom eventually
concluded that the Doonesbury comic strip had a point when it portrayed
Brown as Governor Moonbeam, your employees want and expect you
to act like the boss, not an entry-level employee. As long as you avoid
its all about me behavior, youll be fine. Here are a few tips that should
help you do this:
Choose an appropriate office and furnish it in a businesslike way.
Save the oriental carpet, fancy furniture and TV-stereo combo for
your living room.
Share secretarial and other office help with others on an as-needed
basis. Avoid the urge to hire an unneeded private secretary
whose main job is to make you feel like a big shot and keep
others in their places.
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Park in the lot or garage with everyone else, not in a CEO slot
next to the front door. If parking is tight and others have reserved
spaces, you obviously should, too, but if you are often out of the
office, consider sharing with another employee.
Roll up your sleeves and participate in periodic workplace
cleanup efforts.
Get your own coffee and snacks. If you insist, people will
probably fetch and carry for you, but every one of them will
think less of you for making them do it.
Buy and use equipment such as computers and phones that are
appropriate for the work you really do, not to window-dress
your ego.
Always address and refer to employees by their names. Never
use disrespectful terms like sport, stud, honey, or babe.
Lead, Dont Dominate

If your employees regard you as a decent humanand not just the big
bossthey will be far more willing to share their thoughts about how to
improve the business. Probably many of their brilliant ideas wont be
that great. Some will be self-serving, others will be things you thought of
and rejected years ago, and still more just wont make much sense. Thats
okaychances are lots of your ideas arent so wonderful either. But now
and then an engaged employee will come up with a true gem, something
so valuable that it will make listening to dozens of mediocre ideas more
than worthwhile.
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DRIVE A MODEST CAR
Treat all ideaseven ones that are obviously nonstarterswith

respect. Employees who see others suggestions belittled or dismissed will
be unlikely to make their own. You also need to develop a process to
capture good ideas. This is discussed in detail in Chapter 6, Innovate Now
and Forever. That chapter also explains the importance of making sure
you recognize, appreciate, and reward good ideas that really make a
difference.
Example 1:
Liam answers the phone and schedules service calls for Goodlight,
a local electrical contractor. Because he talks to customers all day,
Liam learns a lot about their needs and desires and sees that
Goodlight is out of touch with some significant new developments
in the market. Liam considers talking to his boss, Peter, about how
introducing two new services might really kick up profits. But ever
since the company began to grow Peter has barely seemed to
have time to nod hello. Still, wanting to share his insights and
ideas, Liam thinks about asking Peter for a short meeting. Then he
hears through the grapevine that when Jen in customer service
tried to suggest changes in the phone system, she was laughed at.
Liam doesnt bother to talk to Peter. Six months later, when a
competitor opens, Liam applies for and receives a job at considerably higher pay, in part because at his interview, Mia, his new
boss, is impressed by several of his innovative ideas. When Mia
implements the first one to immediate success, she not only gives
Liam full credit within the company, but also a meaningful raise.
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Example 2:
Now lets change this story a little and imagine that despite
Goodlights success, Peters personal style remains a little more
homespun. Not only is there a suggestion box in the employee
lounge, but recently a display recognizing the best suggestion of
the previous month was added. The day after Liam has his big
idea, he drops it in the box. The next day, he encounters Peter
helping repair a door on one of the delivery trucks. Peter invites
Liam for coffee and asks him to present his idea in more detail.
Impressed, a few days later Peter convenes a meeting with several
key employees to which Liam is invited. The result is that
Goodlight introduces what turns out to be a highly profitable new
service.
A few months later, when annual profits turn out to be a little
better than expected, Peter announces at a company meeting that
everyone in the company will receive a small bonus. In addition,
he thanks Liam for his creative idea. Later, privately Liam receives
a decent raise and a promotion. After word of this gets around,
Liam is not the only Goodlight employee who resolves to try to
come up with more good ideas.
Once good ideas are captured, its time to implement them. When it
comes time to make the decisions necessary to do this, be sure you include
key employees in the process instead of setting down the law, Moses-like.
New policies and procedures carried out with the input of the people
who will have to cope with them day to day are not only likely to be
more successfulbut they are far less prone to be sabotaged. Remember,
employees who dont buy into new way of doing things can always find
ways to subvert them.
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No question, its easier and certainly quicker to issue an order or

impose a decision than it is to listen, reason, and help build consensus. But
in the long run, its far more efficient to establish and respect a consensusbuilding management structure. Or put another way, a business that is
viewed as being all about you wont be as successful as one your employees
see as also being about them.
I dont suggest that you make your workplace a perfect democracy
where all decisions are equally shared. Leaving aside the fact that its your
business and you have the biggest financial stake in its success or failure,
it simply takes too long for everyone in the kitchen to discuss how much
sugar to put in the brownies. Although Ive seen a very few cooperatively
run businesses do well, I suspect their success has come despite the fact
they elevated democratic decision making to a first principle, not because
of it. Far better to run your enterprise with a strong purposeful center and
at the same time welcome and respect employees opinions and treat
employees themselves with dignity.
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Adopting a Good Decision-Making Process

The relentless pressure to do business at Internet speed often discourages
people from following a careful decision-making process. Even important
determinations are sometimes made too quickly, when you are angry or in
a bad mood or without input from key coworkers. Acting too fast without
gathering all the facts and the opinions of key employees can severely
damage your business. Your goal should be to arrive at the bestnot the
fastestpossible decision. To this end, you want to encourage a creative
problem-solving process designed to bring out important information and
capture the best ideas of your employees.
Although how decisions are made will be very different in companies
with 5, or 25, or 55 employees, here are some elements every good decisionmaking system should include:
Sleep on it. Fight the pressure to make split-second judgments,
and always insist on a reasonable amount of time to consider
your options. The weeks, months, and sometimes even years it
takes to recover from a truly bad decision are always far longer
than the few days it commonly takes to make a good one.
Involve others. People affected by a major business decision,
including employees, contractors, and investors, should have a
chance to air their views before the decision is made. As noted
above, not only does this often make far better solutions, but
just as important, it raises the level of trust in your leadership,
something it always makes sense to bank so that it will be available to draw on at times of crisis.
Support the final result. After an open, candid decision-making
process, once the decision is made, youre in a good position to
insist that the time for singing in different keys is over.
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Credit Is CheapSpread It Around

Flaunting possessions and adopting an authoritarian management style
arent the only ways small business owners find to needlessly bug their
employees and, as a result, decrease their enterprises chances of success.
Hogging credit for the businesss achievements is another huge and
common faux pas. Just as professors are sometimes guilty of putting only
their names on research done largely by their graduate students, owners
of successful small enterprises are prone to act as if they alone made the
business a success. Few things are more disappointing and insulting to
employees who have worked hard and creatively to help build the
company.
At Nolo, we try mightily to foster a culture in which leaders go out of
the way to acknowledge everyones contributions. If this means that our
company meetings sometimes sound like a roll call of every Noloids
achievements, so much the better. People work harder and enjoy it more
when they know their efforts are acknowledged and appreciated. Here
are just a few of the things we routinely do to foster this attitude:
The credits page of each Nolo book lists the names of everyone
who worked on the book, not just the author, legal editor, and
any contributing legal expert. For example, the names of the
people who did the layout and design, proofreading, cover
design, and index also appear.
Senior editors dont hog the cool media appearances. All legal
editors, even brand-new ones, are encouraged to do TV, radio,
and press interviews including, if appropriate, the big national
ones about their legal specialties. For example, not long ago, a
young Nolo editor was chosen to appear on the Today show
because she knew the most about the law of name changes, the
subject of the interview. Despite the fact that her only previous
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TV appearance had been at age 13, accompanied by her wonder

dog, she did great. And perhaps best of all, the dozens of Noloids
crowded around our office TV saw that knowledge about a
subject, not ones title, determines who gets to be media star of
the day.
When a perk pops up, the people whose work was instrumental
in making it happen reap the rewards. When the Nolo website
was nominated for a prestigious Webby Award for best Law/
Government site, the hard-to-get tickets to the awards ceremony
were offered first to the Noloids who worked on the website day
to day, not senior managers. (We won, by the way.)
At company meetings, through companywide emails and at Nolo
parties, we try to recognize hard and creative work throughout
the company. So when our warehouse crew ships a big order in
record time, its common for everyone to hear about their great
job.
Kind words about Nolo from outsiders are routinely shared
throughout the building. Bulletin boards adjacent to the employee
lounge and in our online retail store feature newspaper and
magazine articles about Nolo and its products. And our customer
service department regularly forwards customer emails to everyone in the company. That way, if a customer says, Your book
on immigration law saved me $10,000 and my sanity. Were it not
for you, my parents never would have gotten their green cards,
everyone in the company is thankedwhich is as it should be.
Given that your business is sure to be very different than Nolos,
these examples may not be directly relevant. But again, I hope theyll get
you thinking about how crucially important it is to encourage a culture of
we, not me. If, when the limelight goes on, you can learn to routinely
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step aside while pushing someone else forward, youve made a good
start. But to really help people feel appreciated, youll need to go beyond
fancy words and often superficial employee of the month type programs
to show people you really do value them. In addition to paying decently,
rewarding superior work, and providing good benefits, especially health
care for all employees, adopting a simple stock option or other employee
ownership plan can be the best way to literally put your money where
your mouth is. That way your employees really do know that your business
is about them, not just you.
Thanks can be as important as money.

No question, paying people fairly is a key way to retain
employees loyalty (see Chapter 9, Hire and Keep Good
People). But compensating people decently, or even giving
them a bonus or raise, as welcome as either of these always
is, isnt a substitute for publicly thanking them. Oddly, many
small business owners dont seem to understand this. Its as
if they think that standing up and saying Adam, Mary, and
Wayde did a wonderful job, somehow diminishes their own
contribution, when of course just the opposite is true.
Dont Become Lazy

For a small business owner to build a strong ladder of employee respect,
another rung is essential: your own continued hard work. Especially when
your business begins to prosper, you must continue to work diligently.
Working too little is rarely a problem owners experience when a business
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is in its start-up phase; in fact, its more likely that youll overdo it. (See
Chapter 11, Dont Work Overlong Hours.) But once a business becomes
comfortably solventespecially if affluence comes suddenlya fair number of entrepreneurs go through a quick and unhappy transformation
from hard-working ant to showboating butterfly.
It is easy to understand why the workaholic owner of a suddenly
successful small business may want to take a little time to flit among the
flowers, golf balls, sailboats, or motorcycles. But understandable or not,
going walkabout for any extended period is always a mistake. Few, if any,
of your employees who have worked so hard to help your business succeed will have a similar opportunity, and many will almost surely begin to
resent you. And no matter how successful your small business has become,
its not big or established enough to stay that way long if you withdraw
your attention at the same time key employees become disaffected.
Taking off an afternoon or even a day to indulge a favorite hobby or
just to spend time with your family or by yourself can be good for both
you and, by extension, your business. But redirecting a significant amount
of your time and energy to nonwork activities is not. If you no longer
want to stay involved in the day-to-day management of your successful
business, you may be able to reduce your managerial role by delegating
these tasks to others, while concentrating on another important part of
your business, such as new product development. But if there really is no
part of your business that truly interests and engages you, your best bet is
probably to sell it. That way, you allow the business to move under
committed new leadership while you have the freedom to do other
things. Later, should you be ready to recommit to being a business owner,
youll have the financial wherewithal to start fresh.
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Example:
Ted started Sunshine Electric, a business installing rooftop solar
panels that allow consumers to generate at least some of their
own electricity. For the first couple of years, business conditions
were tough, and Ted paid his two installers, Emily and Angie,
very modest wages. Some weeks he couldnt pay himself at all.
Then when power prices spiked, the business took off. Over the
next 18 months, Ted was able to triple Emilys and Angies pay,
hire 20 more installers, and pay himself a very generous salary
despite the fact that he cut back to working two days a week. In
Teds view, at least, everything was going great until the day
Emily and Angie both quit and announced they were starting their
own business. Ted went ballistic, called them ungrateful and
swore he would never speak to either again.
Finally, six months later, when Ted ran into Angie and Emily
at a supplier, the three former buddies agreed to call a truce and
sit down over a pitcher of beer. When Ted said he had no idea
that Emily and Angie had been unhappy enough to quit, they told
him that when the business was on short rations and the three of
them had worked shoulder-to-shoulder, they felt fairly treated
despite their low pay. But when Sunshine hit the jackpot, and Ted
quickly transformed himself from a hardworking guy with dirty
jeans into a very part-time boss with clean hands, a shiny new
Lexus, and lots of vacations, they had felt slighted. The big raises
didnt change the fact that they no longer felt that everyone was
in the same boat. Had they been given (or even been permitted to
buy) a small ownership stake in Sunshine, they would probably
have hung in there over the long term. But without it, being a
wage slave, even a well-compensated one, to an absentee boss,
just didnt cut it.
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11
Dont Work Overlong Hours
Busiest men find the most leisure time.

Proverb
irtually every article or book profiling a successful entrepreneur

prominently mentions that he or she routinely works a 60- to
70-hour week. Since, in my experience, loads of prosperous
entrepreneurs work far less, Ive concluded that the American media has
predetermined that the ability to go without weekends is a big key to
attaining richesand that people who dont conform to this stereotype
simply dont get profiled. Realizing that the press loves to write about
people who suffer to succeed, I suspect many savvy businesspeople
exaggerate how hard they work. If so, they are part of a long tradition
Ben Franklin admitted in his autobiography that he regularly left a candle
lit in his Philadelphia print shop so passersby would think he was toiling
into the wee hours instead of, in fact, being snuggled cozily in bed.
As with other enduring American folk myths (rich people retire

happy, virtue is rewarded, inventors are heroes), the notion that working
9 to 5 twice each day will all but guarantee entrepreneurial success is
bunk. Its at least as likely that people who work overly long days on a
regular basis will be less successful than those canny enough to keep
their work and personal time in better balance. In a world full of cheap
labor but short on intellectual capital, it rarely pays to try to substitute
hours for smarts.
Although there can be all sorts of reasons why a particular businessperson chooses to work too much, one of the biggest is the belief in a
direct relationship between the number of hours worked and financial result.
But profits flow from businesses that effectively meet their customers
needssomething you can almost certainly do without missing dinner
with your family every night.
Example:
At Nolo, we subscribe to a number of daily, weekly, and monthly
legal newspapers and magazines. Its obviously key to our continued success that all of our legal editors stay up to date on their
specialties. Thats why for years we circulated all the publications
and all looked at them. Then one day someone suggested a new
system by which one person reads for the others, flagging only
those articles that were important. As a result, the total time spent
reading legal journals dropped from 20 to two hours per week,
with no loss of efficiency.
The Importance of a Sane Schedule

Many business owners, of course, would love to work lessbut fear that
if they did, they would quickly go broke. They are almost always wrong.
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DONT WORK OVERLONG HOURS
Most businesses that really meet a customer need offer many opportunities
for an owner to be more productive in less time. Except for starting or
buying a business that soon bores you into disinterest, its my experience
that owner overwork is the biggest reason why potentially successful
businesses close. Working too many hours for too long is bad for your
health and the well-being of your familytwo things you absolutely need
to nurture to have a chance of thriving long-term. Fortunately, in most
instances overwork isnt necessary; by learning to concentrate on the
activities that count most, most entrepreneurs can achieve excellent results
in up to a third fewer hours. If, despite the obvious perils of working too
many hours, you conclude that your business would otherwise fail, you
need to face the fact that your enterprise is not financially viable. Except
possibly during a fairly short start-up phase, your business should produce a solid profit in a reasonable number of hours. If you can scrape by
economically only because you work 60 to 70 hours a week, year after
year, you are not really in business at all. Instead, you have hired yourself, at a rotten wage, to do a task no one values enough to generate a
decent profit.
The Danger of Burnout

Most well-run small businesses become more profitableoften far more
profitableas they age. Often this is because experienced owners figure
out how to take advantage of money-making opportunities that present
themselves along the way. And as years go by, a well-run business that
provides a quality product or service and maintains its competitive edge
will be recommended by an ever-increasing pool of customers, almost
automatically increasing profitability. (Chapter 8, Market Your Business
Creatively, discusses why positive word of mouth is one big key to
success.)
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In short, growing a successful business is like running a marathon,

not a hundred-yard dashto go the distance you must adopt a work
schedule that allows you to pace yourself. Many small business owners
who fail to understand this quickly burn themselves out working far too
much and quit after a few years, in some cases just when their businesses
are poised to make good money.
Example:
Sal and Patricia, each the 30-something mother of young children,
began a business, Z-Pot, importing and wholesaling large glazed
pottery planters from Southeast Asia. They almost immediately
began making a solid profit wholesaling their unique wares to
about 25 nurseries and half a dozen indoor gardener shops. In
addition, they opened their own retail outlet to profitably dispose
of overstock and slightly damaged goods.
But after two years of running both Z-Pots wholesale and
retail businesses, while trying to keep on top of their growing
family responsibilities, Sal and Patricia both felt exhausted.
Patricias husband, whose own career was also going well, began
to strongly suggest that their family life would improve if Patricia
sold her share of the business and stayed home with the kids for a
few years.
Not wanting to give up the business entirely, but recognizing
their problem, Sal and Patricia decided to hire a salesperson to
operate the small retail operation. When, after a few months, it
proved difficult to hire and keep a trustworthy employee to run
what was essentially a cash business, the two women reluctantly
decided to close it and concentrate all their energy on the core
wholesale operation. Although they missed the additional income
the retail outlet had generated, both appreciated the extra time.
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And then an exciting thing happened. Because Sal, who

handled the sales side of the business, had more time and energy
to call on prospective customers, Z-Pot landed several large new
nurseries, with the result that profits actually increased. To get rid
of slightly dinged-up inventory, they held a yearly blowout sale.
Although this meant selling some pots at or even below cost, they
did so cheerfully, knowing they had reorganized their business for
long-term success.
For me, working 35 to 40 hours per week with the occasional week
or two off is about right. It lets me stay focused and interested in my
writing and editing responsibilities and approach them with drive and
enthusiasm. And it also gives me enough time and energy for personal
and family needs. To get enough highly productive work done in this
comparatively short period, I must first understand that all tasks are not of
equal importance and focus on the ones that I personally need or want to
do, something I actually find easier to accomplish when I have limited
time. Occasionally, when I get behind and a deadline looms, I work extra
hours. But Ive learned time and again that if I do this for anything beyond
a few days, my sense of personal well-being begins to erode, and my output of quality work quickly drops. In short, when Im tired and grumpy, I
dont get many good words written no matter how many hours I spend
gripping my pen.
It may be that Im not typical and that many people have a greater
capacity to work long hours. Perhaps, but when I look around at friends
whose small businesses have done extremely well over a number of
years, I see no one who consistently works more than a 50-hour week,
and many who average fewer than 40. The few who regularly put in tenhour days compensate by working fewer days per week and taking at
least a months annual vacation. In other words, virtually every successful
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small business owner I know has adopted a work schedule that provides
them plenty of time to have a life. And I dont believe I happen to hang
out with a lazy or pampered group, but rather that the ability to create a
business that very effectively meets the needs of its profitable customers,
not the determination to work many hours, is the real hallmark of a
successful businessperson.
Interestingly, when I talk to these successful people about how much
they work, many immediately say that although theyre not at work long
hours, that doesnt mean business isnt on their minds. Several report
coming up with their best, most creative business ideas when theyre
swimming laps, tossing a Frisbee to the dog, or just taking a walkaway
from the emails, phone calls, meetings, and other distractions that crowd
days at the office, store, or factory. One friend puts it like this, Busy
workdoing any one of thousands of little tasks at the officedoesnt
improve anything important about how my business operates. Just the
opposite. To have time to focus on important initiatives, I have to stop
spending all day at the office dealing with an endless list of things that
dont really count. When it comes right down to it, I need to take the time
necessary to figure out how to better meet the needs of my customers. If I
can do that, both my business and I will thrive even if I only work 30
hours per week.
Keeping Your Priorities Straight

Ask retired businesspersons you admire to tell you what they learned
about keeping work, family, and personal time in perspective, and Ill be
very surprised if you are told If I had to do it all over again, I would
have worked lots more. Its far more likely that theyll advise you to spend
more of your lifes energy developing personal interests, protecting your
health, and spending time with family and friends.
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Doing good and profitable work is important to leading a satisfying

life, but it should never be all-important. As the old saying goes, All work
and no play makes Jack a dull boy. And if too much work makes your
life one-dimensional, when you retire and work stops, you wont have a
life.
Another way to think about how to fit your work into the type of life
you would like to lead is to make a list of the things you really care
about. Mine would go like this:
stay close to my family (including being willing to interrupt my
workday as needed)
spend time on personal interests and develop new ones
stay physically active and otherwise protect my health
spend time with my friends, and
do work I enjoy and which pays well enough to adequately
support me and my family.
Assuming your list is even a little like mine, work is only one item.
This should really be all you need to know to understand why working so
many hours that you leave inadequate time for other priorities is a poor
way to lead your life. Of course, if work, work, and even more work
were the only way to ward off starvation or keep a roof over your head,
it might be your only choice. But in 21st-century America, people usually
work too much, either because of their own obsessive natures, or to
make up for the fact that their businesses do not connect well with their
customers needs. Too bad that neither of these reasons forms the basis of
a good business plan.
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Planning to Work Less and Make More

If you already work too many hours on a regular basisor fear that a
new enterprise youre planning will push you in that directionhow can
you cut back without significantly reducing your income? The answer is to
understand the importance of delegation, and why, for most entrepreneurs,
its not just a personal necessity, but an opportunity to improve their
businesses.
The Power of Delegation

At the Acme Sandblasting Co., the New York City company my grandfather Frank Stuke Toors owned and ran during most of the first half of
the last century, Stuke personally knew how to do almost every job in the
business. He could make cost estimates for jobs, close a deal, machine a
spare part, splice a rope, write payroll checks, and even collect overdue
bills. A few days before he retired, at 75, he shed his three-piece suit,
donned a respirator and some work clothes, and climbed a scaffold to
prove he could still blast grime off a big expanse of granite.
Stuke was typical of the jack-of-all-trades American businessman
whose heyday lasted from the end of the Civil War through World War II.
In a far less bureaucratic, rule-bound, and technologically sophisticated
world, these people really could cost-efficiently do a great many tasks
themselves. This is no longer true. Contemporary entrepreneurs who try
to run the whole show usually make a big mistake. As Adam Smith
famously noted way back in 1776 in The Wealth of Nations, the principle
of the division of labor is a huge engine driving increased productivity. Or
put more directly, there is almost always some specialist who can accomplish all but your core business tasks better, and ultimately cheaper, than
you can. One good example involves preparing the payroll, something
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that for a modest fee can be farmed out to a highly automated specialist,
freeing your staff from the time-consuming payroll-preparation ritual my
grandfathers business performed every other Friday afternoon.
Of course, it costs money to hire others to accomplish routine tasks.
But because sensible delegation frees up your time to concentrate on the
high-value aspects of your business, it produces long-term profits. And, by
definition, this is even more true for entrepreneurs who run one- or twoperson businesses and must purchase most services from independent
contractors and vendors than it is for larger outfits with many employees.
If, for even a moment, you doubt the wisdom of working with others,
consider that without the phone company, your Internet service provider,
and package delivery companies, you would probably need to spend
every waking hour just trying to deliver essential messages. Fortunately,
because these companies are at our beck and call for a very reasonable
cost, you can efficiently delegate your communications tasks for a fraction
of what it would cost to personally deliver your messages.
Unfortunately, when it comes to many other business tasksfrom
bookkeeping to equipment maintenance and repair to graphic design to
human resources managementthe wisdom of delegation is less well
understood. In a nutshell, thats a big reason why so many Americans
persist in wrongly believing long hours and high profits go together.
People who work overlong hours often do so precisely because they fail
to grasp the crucial difference between routine work and high-value work.
Example:
Jeff is an architect whose firm, J&D Associates, designs big buildings
such as schools and hospitals. Although he is a gifted draftsman,
Jeffs real skill is his ability to inspire people who have different
agendas to agree on design issues. Given that the success of every
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J&D projectas well as the firms reputationdepend on gaining

the support of many powerful stakeholders, including neighborhood groups, school or hospital administrators, building contractors,
and trade unions, its easy to see just how crucial Jeffs special
talent is to J&D Associates success.
Fortunately, both Jeff and his partner, Dale, a more introverted
type who enjoys sitting in the office and designing the buildings,
understand that Jeffs time is best spent coaxing everyone to sing
the same tune, not sitting in front of a computer dealing with the
details of building design. If this means Jeff and Dale have to hire
an additional draftsperson to get all the plans done on time, its a
small price to pay for keeping Jeff focused on the high-value job
he does so well.
What Do You Do Best?

Before you can delegate well, you need to understand the things you do
that contribute the most black ink to your bottom line. Only then can you
aggressively look for ways to get someone else to do the other bits. So
your first step is to identify the tasks you must really do yourself, as
opposed to the large number you handle either because no one else is
available, you believe you cant afford to hire help, or for some other lessthan-convincing reason. For example, if you are a website designer, and
customers are attracted to your small design company because of your
imaginative graphics skills, it makes sense for you to concentrate on the
creative process. Dont spend your energy interviewing candidates for the
administrative assistants position or renegotiating the leasethings that
need to be done, but that wont affect your relationship with key customers.
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Example:
Hallie owns MusicWorks, a new and used CD store. Most of the
profit comes from the sale of used CDs, because they can be
bought cheaply and marked up a far higher percentage than can
new CDs. But the used music business has a big Achilles heel:
There is virtually no market for most of the product people bring
in for sale. Hallies business wont last long if she buys Bobbie
Blue Bland Live at Reno, Fess Parkers Greatest Hits, or tens of
thousands of other titles nobody wants.
Thats why, on the days she works, Hallie personally buys
and prices used CDs from 10 until noon and again from 2 to 4,
rejecting at least 90% of what shes offered. It also explains why
Hallie hires a manager and assistant manager to open and close
the store and supervise the college students who cover the sales
counter, restock shelves, and do other routine tasks. Although her
shop is open from 9 a.m. to 10 p.m., seven days per week, Hallie
works only from 9:30 to 5, Tuesday through Saturday, and takes
time to go jogging in the middle of the day.
When Should You Do It?

Many enterprises, including creating arts and crafts, designing websites,
and writing books, allow their proprietors to work flexible hours. If you
have substantial control over the hours youll work, youll want to carefully assess which part of your workday is most productive. As a writer
and editor who also has important administrative responsibilities, I know
from long experience I produce the bulk of my writing, editing, and content design work between 8:30 and 11:30 in the morning. And, especially
when I get some exercise in the middle of the day and drink a cup of
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coffee, I often experience another burst of creative energy in the middle

of the afternoon. All told, this means I only have about 20 to 25 hours per
week in which to work at peak efficiency. It is extremely important that I
actually use them to produce or scope out new products, relegating as
many of my administrative duties as possible to other times.
Similarly, a dentist who feels best and works most efficiently in the
middle of the day should schedule root canals and other difficult highprofit work at this time, while handling more routine tasks in the early
morning and late afternoon. And it makes sense for a programmer who
writes code best in the middle of the night, when its quiet enough to
think, to reverse the clock.
But if you run a restaurant, tutor kids, or operate a flower stand, to
mention just a few time-sensitive businesses, youll do most or all of your
daily trade in a relatively few predetermined hours. To succeed, this means
youll need to dovetail your personal work schedule with the needs of
your business. Ideally, youll find considerable overlap between your most
productive hours and the times when your business absolutely needs you
to be on deck. If your times of peak productivity dont substantially overlap with these critical hours, its a huge indicator that you are in the wrong
field. No matter how much a food-lover dreams of opening a fancy supper
club, if she wakes and sleeps with the robins, shell almost surely do far
better to try a caf serving breakfast and lunch.
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Dont work when you dont need to.

Look at the possibility of cutting back your hours during
times when your business isnt particularly profitable. For
example, if you own a caf that does 40% of its business at
lunch and another 40% after 5 p.m., do you really need to be
open all afternoon just to pick up a few extra customers? Or
would you be better off locking the door and taking a nap,
spending time with your kids, or doing something else to
restore your energy for the evening rush?
Often it takes both a determined commitment and real creativity to

sensibly adjust ones work hours to produce a saner schedule. Sadly, many
business owners must experience a family emergency or health crisis to
face up to the need to make a change. But fortunately, this isnt a requirementthere are almost always loads of ways for a determined person to
work less and make more. One of the best is to eliminate customers who
arent profitable. Serving a significant number of money-losing customers
is a huge problem for many small businesses. Identifying your losers and
taking steps to either turn them into profitable customers or finding a way
to diplomatically fire them will immediately free up the time to recruit
more lucrative replacements.
Example:
John drives a cab in a suburb where throngs of residents commute
by train to a nearby city. This means John is super-busy from 6 a.m.
to 8:30 a.m. and again from 4 p.m. to 8 p.m.; during these times,
he can typically fill his cab with three or four regulars for each
train, earning as much as $50 per hour. During the rest of the day,
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John not only has fewer customers, but because he typically

drives one person at a time, earns significantly less, sometimes as
little as $15 per hour. Even though John is often tired and irritable
as a result of his 14- to 15-hour days, he believes he cant cut
back and still earn enough to pay the mortgage and all the other
bills of a growing family.
Fortunately, Johns wife Peg finally proposes a way out of the
time trap. If John will stop driving from 9 a.m. to 3 p.m. each day,
devoting two hours to shopping and preparing meals, and taking
off the rest, Peg will get a second cab permit and drive the
familys other car from four to seven during the peak evening
commute. Grandma agrees to stop by each day to be sure the kids
are safely in the house and doing their homework by 5:30. The
result is that by shifting work to the most productive times, family
income goes up significantly, while the total hours expended to
earn it drop substantially.
How to Delegate
Many small business owners readily agree they need to learn to delegate
tasks that someone else can do better. But they put it off. One man who
puts in 12-hour days at his Internet-based sports memorabilia business
and whose wife had recently threatened him with divorce told me, I
know I need to cut back, but I just cant spare a dime to hire help right
now. When I explained that learning to delegate is even more important
for a tiny struggling operation than it is to an established and profitable
enterprise, he asked me to how to go about it. Heres what I told him.
There are two keys to making a delegation plan work. First, you
need to find people who can do the task as well as you can and at less
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cost. Again, if you understand Adam Smiths basic point that productivity
increases and costs drop when work is divided into a series of tasks, with
a specialist assigned to accomplish each, youll also understand that this
shouldnt be difficult. No question, if you are a perfectionist who has
trouble letting go of even the simplest tasks, learning to delegate can be a
big hurdle. But perhaps it will help get you started if you are able to
concede that there really are people in the world at least as competent
and careful as you are. (See Chapter 9, Hire and Keep Good People.)
Whether the person you hire is an independent businessperson or an
employee is not important. What is crucial is that you know the job is in
excellent hands so you can let go of it. And this is just as true if you are
hiring someone to do routine tasks, such as keeping an office running
smoothly, or work that is crucial to your businesss success, such as
making important sales calls.
The second key to profiting from delegation is to put at least some of
the time you save into more profitable activities. For example, if finding
new clients for your financial planning service is the activity that will most
positively affect your bottom line, youll want to delegate routine tasks
such as bookkeeping, using time saved to sell more. That way you win
three times: revenue goes up, your total work hours go down, and the
jobs you delegate get accomplished better.
Example:
Tina owns and runs East Mountain, a rural yoga center that offers
weekend and week-long retreats. Like many small business owners,
Tina finds herself stretched too thin, trying to deal with the many
workaday details of running East Mountains business and at the
same time paying enough attention to her core job of spending
time with guests and teaching many of the classes. Finally, realizing
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that something has to give, Tina makes two lists: one of the timeconsuming tasks that wear her out without really making much
difference to East Mountains success, and a second list of the
tasks that really are important to attracting clients. The routine
jobs include meal preparation, bookkeeping, and designing promotional materials; the ones that are most important to customer
satisfaction are teaching excellent and innovative yoga classes and
spreading the word about East Mountains unique yoga programs.
Tinas next step is to find good people to accomplish the
noncore tasks at a price she can afford. When it comes to designing brochures and doing the bookkeeping, it proves relatively
easy to find affordable independent contractors to take over.
Unfortunately, hiring someone to do all the meal preparation turns
out to be prohibitively expensive. So, instead, Tina decides to hire
a cook to coordinate dinners only, relying on workshop participants willing to trade work for a tuition reduction to prepare East
Mountains simple breakfast and lunch offerings. To cover the
additional costs of hiring others, Tina decides to devote 20% of
the hours she saves to teaching two more classes per week and
50% to increasing East Mountains marketing activities (the other
30% she saves for herself).
Tinas increased marketing efforts include writing articles for
interested media, preparing periodic press packages highlighting
East Mountains new and noteworthy offerings, and, most of all,
using email, regular mail, and the occasional phone call to stay in
close touch with former students, yoga teachers, and others in the
yoga network. As a result, business increases by 40%. This, in turn,
allows Tina to raise her rates by about 20%, with the result that
East Mountain is more than able to cover its additional labor costs.
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12
Learn to Live With Luck
Fortune brings in sound boats that are not steerd.

William Shakespeare
atching small businesses succeed and fail over the years,

Im often reminded of how big a part luck plays. Sometimes it seems as if fates fickle finger reaches down from
the sky and chooses a perfectly ordinary business for huge success; on
other occasions the gods seem perversely determined to frustrate the most
worthy enterprises.
I have no idea why some businesspeople are luckier than others.
Perhaps like a quarter, which when tossed in the air enough times will
eventually land on its edge, we are simply observing the laws of statistics
applied to small business success and failure. After all, someone is bound
to start selling telescopes the day before a huge new comet is discovered,
while someone else opens a beachwear business the summer of the
hundred-year flood.
But whether we view luck as a statistical, metaphysical, or magical

phenomenon, we can probably agree that by its nature it cant be predicted or controlled. Why not, then, just cross our fingers and move on to
consider things we can affect? Because, while hoping to be lucky is never
a viable business strategy, learning to manage the fallout from both good
and bad luck certainly is. And one key aspect of doing this should be the
determination to learn the important entrepreneurial lessons that both
good and bad fortune so frequently reveal.
The Perils of Good Luck

How you cope with the ups and downs of fortune, as well as what you
learn from it, will often have more to say about your ultimate success or
failure than whether your luck was good or bad in the first place. To
illustrate this point, let me tell you what happened to the five novice
publishers Ive come to know over my long career in publishing, after
they each had the good fortune to publish a highly profitable bestseller
something most publishers never come close to doing.
One recognized that his extraordinary good luck was just that and
never published another book, preferring to put his considerable profits
into real estate and other good investments outside the publishing business.
He retired wealthy from the publishing business at age 38.
Two of the other initially fortunate publishers took a far different
approach. Excited by their big success, and convinced it came as a direct
result of their brilliance, both immediately plowed all their profitsand,
in one case, every dollar she could borrowinto publishing a long list of
titles. One of them, Megan, published cookbooks, mysteries, yoga guides,
how-to books, and metaphysical tracts. The other, Andr, was at least
sensible enough to stick to how-to sports guides, the area of his initial big
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LEARN TO LIVE WITH LUCK
score. But like Megan, he, too, made the mistake of publishing so many
titles so fast that both editorial quality and marketing focus got lost.
Megans business went belly-up within three years. Andrs failed in fewer
than four.
The last two lucky publishers also published more titlesin one
case, regional travel books, and in the other, small business guides. When
their subsequent books predictably failed to do nearly as well as their
initial bestsellers, each had to face and master the thousands of things it
takes to run a successful publishing operation. As they gradually learned
to publish books their target audiences really wanted to buy, these two
publishers expanded their lists of titles slowly, conserving much of the
cash their bestseller had generated. After more than a little struggle, both
eventually developed reliably profitable businesses.
It can be convincingly argued that the two publishers who failed did
so precisely because they were so blinded by good fortune that they
never bothered to learn the basics of running a good small publishing
company. And that the two who built solid businesses succeeded, in part,
because they understood that good luck doesnt often knock twice at the
same door and that they needed to use their initial windfall to help build
a solid, long-term publishing company.
Here are a few of the lessons luck has taught me. I share them in the
hopes that you wont have to learn as many of them the hard way as I
have.
Dont mistake luck for genius. Good luck rarely makes you
smarter. In fact, the opposite is far more likely to be the case. A

ten-year-old who, by chance, sets up a lemonade stand on the
blistering hot Sunday that real estate agents are showing the
house across the street is likely to conclude that making money
is easy. Hell learn a more accurate, albeit costly, lesson if he tries
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to repeat his success on a cloudy Tuesday after the house is sold.

And like lots of adult entrepreneurs, if he misses the point that
his big break has come and gone but, instead, concludes that
building a bigger stand and adding grape juice and cookies to
the menu will reignite profits, hell get his knuckles rapped a
second time.
If you are not blinded by luck, you can often learn from it. If
your first self-published novel goes gold because Oprahs producer discovers it after you inadvertently leave it on an airplane,
congratulationsyouve been hugely lucky. What you havent
done is to stumble on a reliable business strategy. Even if you
write 50 more books and leave them on 500 more airplanes, your
big break is highly unlikely to repeat itself. But it is also true that
an entrepreneurial insight lurks behind most luckyand many
unluckyevents. For example, if our lemonade kid checks the
paper for open houses, and the weather report for hot days, he
may be able to move his stand around town, one step in front of
a crowd of thirsty house-hunters, turning his lucky strike into a
sweet little business. Similarly, the lucky author who now knows
that talk show producers play a big part in book promotion may
be able to use this information to find more reliable ways to put
his subsequent titles in front of them.
Bad luck can also teach you how to make a profit. Whether its
an earthquake, war, or a sudden recession, whenever an unexpected event happens, we all receive a mental jolt. Suddenly our
perceptions have been changed. Unfortunately, a big change can
quickly flatten a little business; fortunately, creative business
opportunities also abound when change is rampant. For example,
in the months immediately after the terrible events of September
11, 2001, many New York City tourist-related businesses were hit
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hard. Among the first to recover were those that realized that
while fun-seeking visitors to the Big Apple were at least temporarily a thing of the past, millions of Americans wished to express
solidarity and sorrow by visiting the ruins of the World Trade
Center and reengineered their business accordingly.
Put half your money in your pocket. Anyone who enjoys the
occasional flutter, whether at Las Vegas, Atlantic City, or the little

bingo game down the road, knows the heady feeling of hitting a
run of luck. Sometimes the slot machine just seems to get stuck
producing jackpots. But no one wins forever. To plan for the
moment when your luck goes into long-term hibernation, sensible
management dictates that you plan to have something in your
pockets besides your clenched fists. When my dad, who liked to
make a wager once in a while, made a few dollars at the track,
the stock market, or cards, he always saved half and continued
playing only with the rest. If he lost that portion, he quit, still far
ahead. Dads strategy meant he was a big, long-term winner,
unlike some of his friends.
When you hit the jackpot, diversify. In the last years of the 20th
century, just as in the 1920s and other periods of investment

bubbles, many people came to believe that stock prices would
always keep rising. As a result, they put every dollar into the
market, sometimes even borrowing money to invest. Each time,
for a few years this bet-the-house strategy worked so brilliantly
that loads of people became rich, at least on paper. But when
the crash inevitably came, it wiped out most of these speculators.
The exceptions were people who had the good sense to spread
their initial gains over a number of types of different investments,
including bonds and cash.
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To see how similarly spreading ones risks by diversifying can work

brilliantly as a small business strategy, take the example of Anna, a dentist
I know. When one of Annas local competitors died suddenly, and two
others unexpectedly retired, Annas practice turned into a cash machine.
Reasoning that new dentists were sure to move into the area soon and
siphon off some of her business, Anna used her windfall to buy a small
professional building. She then rented office space to the four dentists
who opened new practices, allowing her to cut back to three days per
week and at the same time enjoy a substantial increase in net income.
Coping With Bad Luck

All businesses, even the biggest, must regularly cope with many events
beyond their control. Should an unexpected development shatter your
best-laid plans, you can be forgiven for loudly cursing your misfortune. It
will seem damned unfair if rapidly rising electricity rates make customers
spurn your showroom full of outdoor spasespecially if thats all you sell.
And, of course, after September 11, 2001, many travel-related businesses
through no fault of their own, lost so much business that they failed.
What should you do if an ill wind threatens to turn your business
inside out? Essentially you have three choices. Lets look at each one.
Face It
Nobody likes bad news, and most of us have a tendency to avoid facing it
for as long as humanly possible. But no matter where it comes from or
how severe it is, putting your head under the pillow and hoping for the
best is always a mistake.
Here at Nolo, we have more than once mistakenly persisted with
projects Lady Luck seemed determined to spit on. One situation that
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comes vividly to mind involved commissioning a consumer advocate, who

hosted an immensely popular daily radio show, to write a California
consumer rights guide. Unfortunately, almost before the author could fire
up her PC, the station changed ownership, switched to an all-news format,
and killed all nonconforming shows, including hers. Instead of facing up
to the fact that without our popular author personally promoting the book
on the air, we had little chance of selling enough of what amounted to a
laundry list of consumer rights and remedies, Nolo decided to soldier on
and hope for a miracle. Not only did we spend months editing and
publishing this book, to predictably non-miraculous sales, but we also
compounded our costly mistake by keeping it in print for several years.
In hindsight, its clear that if we had immediately faced up to the fact
that events beyond anyones control had dealt the book a killing blow,
we could have redirected our energy to more promising projects. So why,
after many years in the publishing business, did we fail to pull the plug
on a project we should have known was doomed? The answer, which I
think is relevant to many, if not most, businesses, is that it was hard for us
to admit to the enormity of the bad news we had been hit with. It was
psychologically far easier to deny the worst, hope for the best, and keep
marching.
Here are some of the reasons Nolo found to continue with this
project:
We liked the author and wanted to stand by her. We preferred
losing money to being thought impolite or disloyal.
We found it tough to deliver very bad news, even to ourselves.
Some of our editors had fallen in love with the idea of doing the
best-ever California consumer guide, and we chose to ignore the
fact that our marketing department repeatedly pointed out that
without lots of ongoing publicity it wouldnt sell.
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4. We had already done considerable preliminary work on the

project and were loath to write it off. Somehow it was tougher to
admit that we had already lost some money and quit than it was
to spend twice as much more and pray things would somehow
work out.
You may have used similar logic to avoid facing difficult situations. If
so, you know how easy it is to let a combination of wishful thinking,
inertia, and a reluctance to disappoint others blind you to the need to cut
losses when faced with unexpected bad fortune. But if you try to ignore
unlucky events, a business that could be profitably redirected, or at worst
abandoned without devastating loss, may become an expensive albatross.
(This is discussed in more detail in Chapter 17, React Quickly to Bad
News.)
Outsmart It
It is my experience that no matter how acute your short-term pain, you
need to try to come up with creative ways to overcome itor, when the
bad breaks are likely to quickly run their course, to simply outlast them.
In fact, I know several very successful small business owners who trace
their long-term success to circumventing exactly the kind of ill fortune
that caused many others to bolt the doors and run for the storm cellar.
Example:
Craig opened Fish Feathers, a retail fly-fishing equipment business,
just weeks before the city discovered a serious soil contamination
problem and closed the street in front of his store for three months.
After spending an hour kicking a brick around the back yard,
Craig accepted the fact that customers would be all but nonexistent
until the street reopened.
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Deciding to borrow enough money from his sister to pay the

rent, Craig set out to use his suddenly free time to create and
promote FishFeathers.com, a website offering his merchandise for
sale online. Two years later, when his online sales were almost
twice those of his shop, he came to see that without the bad luck
of the street closing, his business might never have succeeded.
The events that result in both good and bad luck are usually full of
information. A spike in electricity prices, a change in climate patterns, or a
terrorist act all change the way large numbers of people look at important
parts of their lives. And like it or not, when that happens, just as many
businesses will find ways to profit as will be economically disadvantaged.
Example:
Emily, an acupuncturist, specialized in helping people coping with
depression. Then her area was hit by a devastating earthquake
likely to affect peoples psyches for years. Quickly realizing that
during times of war and disaster peoples personal feelings of
isolation and depression are often relieved by their natural concern
for others, Emily decided to reconfigure her practice around the
goal of helping people reduce stress. When both her business and
her personal satisfaction went up, she knew she had made the
right choice.
Sometimes it may be necessary to make fundamental changes to your
business to work around the problem.
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Example:
Janet, a lawyer who specialized in IRS audits, lost more than 50%
of her business when a kinder, gentler IRS cut back on punitive
collection practices. Instead of exiting the tax business, Janet
decided to develop several new tax-related specialties. One was
to coach small businesses on how to legally hire independent
contractors in a way that would avoid the considerable and
expensive risk that the IRS would later classify these people as
employees. Another was to counsel divorcing couples on how to
understand and cope with the tax aspects of dividing their property.
A third was to provide estate tax planning services to upperincome taxpayers. Together, these new initiatives turned out to be
more profitable than Janets old audit-related business.
Cut Your Losses and Move On

A single stroke of bad luck rarely destroys a business. But, although its
unusual, fate can deal your business so severe and lasting a blow that
your best approach is to move on to something else. For example, say
you open a combination newsstand and used bookstore just down the
block from a Starbucks, to take advantage of the heavy foot traffic. If the
coffee shops building burns to the ground the next week, it probably
makes sense to rethink the viability of your businessespecially if
Starbucks announces plans to reopen several blocks away and there are
no immediate plans to rebuild the burned-out building.
Unfortunately, it can sometimes be tough to tell the difference between
an unlucky event that you can outlast, outsmart, or quickly learn to profit
from and one thats a business-killer. Say you specialize in booking tours
of the historical treasures of Egypt, and a particularly nasty spate of
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violence means most travelers decide they dont really need to see the
Pyramids after all. How do you know whether its better to hang on and
hope for peace or quit? Im not smart enough to answer that one. But
here are a couple of other (and, I hope, easier) questions I suggest you
ask yourself if your business, or a part of it, is buffeted by an ill wind.
Does the bad news hit at the core or the periphery of your
business? The harder it hits your core assets, the tougher it will
be to outlast it, and the quicker youll need to face up to its
consequences and act. This means youll need to promptly figure
out a plan to circumvent the bad luck, reconfigure your business
to profit from it, or cut your losses and run. On the other hand, if
only one aspect of your business takes an unexpected hit, leaving
others strong, at least you have the option of waiting to see
whether or not good luck will soon replace the bad. For example,
if you sell both wood stoves and backyard spas, the water rationing that accompanies a prolonged drought may all but kill your
spa sales. You may want to emphasize the stove business, but
keep stocking spas in the belief that when normal weather eventually returns, youll be well-positioned to recoup your losses.
How long will the effects of the bad fortune last? Be honest. If a
new world-class shopping center is likely to drain much of the
foot traffic your candy shop depends on from the slightly tatty
older mall you are located in, it will bring you little joy to hang
on and hope for a miracle. You need to promptly face up to the
need to move, unless you can so fundamentally reinvent your
business that the unlucky event will no longer pull you down.
For example, if you are able to cook up a new type of candy so
delicious and unusual that people will drive out of the way to buy
itor order it by phone, fax, or emailyour low-cost location
may even be an advantage.
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By contrast, if you are located on Main Street and another

candy store opens down the block, it may be much easier to
come up with a sound strategy, albeit one that may involve
short-term pain, to ensure that if there isnt enough business for
two shops, yours is the long-term survivor. For example, you
could remodel your shop, increase your selection, improve your
marketing, and hold frequent salesthings that will be of longterm benefit even if, as you hope, the other shop closes.
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13
Pay Your Bills Early
He is rich who owes nothing.

Hungarian proverb
usiness advisors frequently recommend that entrepreneurs wait

to pay their bills until the day they are due, or even until they
are dunned a few times. They justify this strategy by claiming
that businesspeople who pay their bills early or on time dont understand
the time value of money. Far better, they claim, to pay as late as possible,
putting any money not needed for day-to-day operations into an interestbearing account, thereby making a profit on the other guys money.
Sound good? Over three decades of running a successful business
have convinced me its terrible advice. I firmly believe that your best
strategy is either to pay up front or to pay your bills early.
The Benefits of Paying Bills Early

Every time I read another article exhorting businesses not to pay until the
clock strikes midnight on the last possible day, my first thought is that the
commentator has never run a business in the real world where a reputation
for keeping ones word is a hugely important asset. Here are five powerful
reasons to pay your bills at least a few days early whenever you can
afford toand sometimes even if you must scrimp to do so.
It Builds Trust
Each working day, you (and every other small entrepreneur on Earth)
form judgments about the other businesses you come into contact with.
For example, even as you read this, business owners are arriving at
conclusions like these:
Business A produces a reliable product.
Business B employees can be relied on to show up when they
say they will and work overtime if thats what it takes to finish a
job.
Business C constantly comes up with new and innovative services
that frequently anticipate our needs.
Business D always seems to be understaffed by surly employees
who never return phone calls.
Some of the younger employees Business E hires are not properly
trained.
Damn Business F to hell. Another day is here, and its check isnt.
When thoughts like these run through your head, youll doubtless
question whether you ever want to deal with business D, E, or F again.
And if you had to choose one of these less-than-stellar outfits to head
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PAY YOUR BILLS EARLY
your blacklist, I bet it would be the one that doesnt pay when its supposed
to. And that makes good sense. As tough as it is to cope with late deliveries,
unreturned phone calls, inexperienced workers, or even problems with
the quality of products or services, its not as hard as trying to survive
without being paid.
The corollary to the rule that a late-paying business gets a high spot on
your bozo list is that youll undoubtedly notice and appreciate customers
who always pay you on time. In fact, the only customers you value more
are probably those who either hand you a check when your goods or
services are delivered or put it in the mail the day they receive your bill.
Understanding that it puts them at the front of the popularity parade,
shrewd businesspeople make it a policy to pay bills very promptly. And
despite the disinformation promulgated in the business press by pay late,
save money advocates, this insight is far from new. For example, in
Abraham Lincolns time it was a high compliment to say a man paid cash
on the barrelhead, as opposed to asking for credit.
But what about the point that by paying bills earlyor even on
timeyou are giving away money? My answer is that compared to the
expense of all the other things you could do to build the same degree of
trust and respect in your businesss community, the cost of paying a little
early is incredibly low.
It Ensures Excellent Future Service

I have long made it a policy to pay small business owners I work with on
a personal basis the day I get their invoices. If possible, I put the check in
the persons hand the day the job is done; otherwise, I mail it immediately.
Paying promptly and in full is the best way to let these people know how
much I appreciate their good work. And this simple courtesy almost always
pays big dividends should I ever need to ask one of them for expedited
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service in the future. If, facing a last-minute emergency, I need extra help
from Genevieve, the woman I hire to drive my mother to the doctor, or
Juan, who occasionally helps care for my yard, I know the fact that I have
always paid them very promptly will mean they will do their best to
accommodate me.
And, of course, this approach works just as well for small businesses
as it does for individuals. Everyone from your freelance bookkeeper and
graphic designer to the person who cleans your office will know whether
you pay your bills early, on time, or are habitually late. And if you pay
promptly without being dunned, they will think more of you and do more
for you. Its that simple.
Example:
D&B Concrete Removal made it a policy to pay all the independent
contractors it worked with as promptly as possible, often even
before the invoices were due. Fred, D&Bs president, had never
forgotten how important it was, during D&Bs early years when
money was always tight, to be paid on time, and he wanted to
extend the same consideration to the people D&B worked with.
This practice paid huge dividends the day a water main
broke, flooding essential equipment in D&Bs storage yard at a
time when D&B was barely keeping up with a big contract and
would face penalties for late performance. Fred was able to pick
up the phone and place emergency calls to the shops that maintained D&Bs concrete saw and other equipment. Everyone
responded immediately and effectively to help D&B clean critical
machinery, with the result that D&B was back in business in 48
hours and able to meet its deadline.
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It Builds Positive Word of Mouth

Paying your bills promptly is a great way to encourage the people in your
entrepreneurial network to recommend your business. It is a far better
and cheaper way to build a loyal customer base than is most advertising.
(See Chapter 8, Market Your Business Creatively.)
Keep in mind that its not just your satisfied customers (people who
pay you money) who will tell others about your business. All the people
who work for and with you are also potentially powerful recommenders.
Everyone you cut a check tofrom your landlord and insurance broker to
the owner of the catering business down the street that occasionally
provides food for your meetingshas a stake in your being successful. If
they like you and your businesssomething that is always greatly aided by
paying their bills promptlyeach can become a powerful marketing ally.
Example:
Doug, an insurance broker, goes to great lengths to help Bluebelle
Web Design find an insurance company willing to customize a
standard business policy to meet Bluebelles special needs. Joan,
Bluebelles president, is so impressed with Dougs creative work
that after the policy is finally in place and Bluebelle is billed, she
ignores the ten-day payment terms and immediately mails the
premium check along with a note of thanks. Now its Dougs turn
to be pleased. Later that week, when he attends a local service
club meeting at which the subject of small business websites comes
up, he favorably mentions Bluebelle to what amounts to a roomful
of potential customers. As a result, Joan picks up a couple of
excellent new accounts.
Would Doug have still recommended Bluebelle if he hadnt already
been paid? Possibly, if he liked Joan and respected her business. But what
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if the service club meeting took place a month later and, even after Doug
had made several phone calls, Joan still hadnt paid? You know the
answer.
It Builds a Positive Credit Profile

When your business is tiny, the rest of the commercial world will hardly
know you exist. But soon your little operation will begin to leave tracks in
the entrepreneurial sand. Your first small financial marks might not be
spotted for yearswere it not for the existence of businesses whose
business it is to find and report them.
Once you incorporate, form an LLC, hire employees, or apply for a
bank loan or trade credit, youll automatically make it onto the radar
screen of Dun & Bradstreet or a similar data collection organization. These
outfits gather and sell credit information about virtually every American
business. Among other things, they note the name of your business, what
it does, how many employees it has, who owns it and, probably most
important, its credit and bill-paying history. In short, your bill-paying
profile is available to anyone who pays a modest fee.
Who is likely to buy such a report? Banks that are considering lending
you money, companies considering your application to lease equipment
on credit, and suppliers, wholesalers, and other businesses from which you
have requested credit. True, an excellent payment record wont guarantee
that youll receive a big bundle of commercial credit or a particular loan;
other information is also important. But if Dun & Bradstreet reports that
you habitually pay late, your application is very likely to raise a red flag.
It Provides a Safety Net If Things Go Badly

Owners of failed or failing businesses typically tell hard-luck stories. The
economy unexpectedly turned down the month after the business
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committed all its savings to expand, or the most trusted employee opened
a competing business and stole the best accounts, or a big customer who
owed $50,000 went belly-upor maybe they all happened at once.
If this sounds like a run of luck so terrible it would be enough to kill
any business, I have important news for you: As the bumper sticker says,
shit happens. Instead of making excuses for failure, you need to be prepared to survive when things go wrong, as sooner or later they inevitably
will. Sure, your first job is to keep a wary eye out and duck as much dung
as you can. But no matter how quick you move, youll rarely avoid it all.
It follows that you need to be ready with a survival and recovery plan.
Undoubtedly, the best way to accomplish this is to have a substantial cash
reserve. But in the real world, where most businesses need every extra
penny to grow or improve their operations, its no easy job to keep a
chunky sum in your bank or money market fund, just in case of emergency.
Fortunately, should the business gods turn perverse, getting into the
habit of paying your bills promptly, if not early, can weave a strong safety
net. Thats because people who run their businesses well enough to pay
bills before they are due have considerable leeway, in case of emergency,
to postpone paying most bills for at least a month or two. And at least as
important, they can also draw on the substantial reservoir of goodwill and
respect they have built up by their long-standing scrupulous payment
practices.
Suppose Franks Marine Services, a long-term customer of your
engine repair business, faces a difficult business patch as the result of a
waterfront fire, and asks for extended credit terms. If FMS has always paid
you on time or early, chances are you will be as accommodating as
possiblecertainly far more generous than you would be if Benjis Boat
Repair, your most feckless customer, asked for similar help.
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Make Friends by Charging Less

Another excellent technique a service business can use to build a highly
positive business reputation is to occasionally charge less than the price
quoted for a job. For example, if your service business completes a job in
significantly less time than you expected, reduce the customers bill. Not
only is this an honest business practice, like paying a bill before you have
to, its almost sure to result in very positive word of mouth about your
business.
Example:
Peter, a stonemason, specializes in the repair of traditional
masonry fireplaces, commonplace in houses built before builders
found it cheaper to switch to metal fireboxes. Still, in the
older residential areas where Peter works, there are plenty of
decaying masonry fireplaces to keep him busy. When Peter bids
on a major fireplace job (rebuilding the entire unit from the
basement up), he estimates his total labor, materials, and permit
costs and then marks the total up to allow for a decent profit.
Finally, when bidding on bigger jobs in old buildings, he adds
on 10% or more to cover unforeseen problems all too likely
to crop up. Although real trouble develops only occasionally
(and Peters contract protects him from some potential
liabilities), the 10% cushion he charges on every job can be a
real lifesaver when he inevitably hits a truly hellish one.
But, occasionally, Peter overestimates how long a job will
take. This is just what occurred when he bid $12,000 to rebuild
two big and badly degraded fireplaces for Tania, who was
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remodeling her Calvin Coolidge-era house. In fact, the job

went surprisingly faster than expectedso well, in fact, that if
Peter had been billing after the fact, he would have charged
only $10,200, including his 10% cushion. As a result, Peter
reduced Tanias final invoice by $1,000. Tania, who already
thought Peter had done a magnificent job, was as flabbergasted
as she was delighted. Although she had lots of experience with
contractors who came up with elaborate sob stories to justify
trying to charge more than they bid, this was her first experience with anyone as honest as Peter.
In fact, Tania was so pleased that she told a number of
her friends, including Dan, a successful local real estate broker
who often sold older houses. Dan, too, was impressed and
began to recommend Peter whenever a seller needed to repair
a fireplace as part of putting a house on the market. The result
was that Peter picked up several additional jobs each year. In
fact, over the course of the next five years, Peter could trace
$100,000 worth of work back to his $1,000 refund. It was
easily the best investment he ever made.
What to Do When You Must Pay Late

Should you find you cant pay all your bills on time, the best strategy can
be stated in three words: communicate, communicate, communicate.
Dont wait until you receive a third dun letter to talk to the people whose
check is not in the mail. As soon as you realize you have a problem
paying a bill on time, pick up the phone and call your creditor. Making
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sure you talk to the person who has real authority to manage accounts
receivable, briefly explain what the problem is and when you expect to
be able to pay. If you can make an immediate partial payment, even a
small one, its absolutely essential that you do so. As the old saying goes,
it always pays to put your money where your mouth is.
Occasionally, people who cant pay a bill on time are tempted to
detail all the miserable things that prevent them from doing so. Dont get
carried away. Telling too good a story can be counterproductive, since it
risks convincing the creditor that your business is in real jeopardy of failing.
While its effective, not to mention polite, to briefly explain a good reason
for the holdup, focus instead on knowing when your check will be in the
mail, and then do your best to keep your promise.
Be realistic.
If you have had a good payment history, many creditors will
let you catch up on past due bills in periodic increments, as
long as they believe youll really do it. It follows that the key
to developing a successful plan is usually not in how much
you agree to pay on any given date, but that the creditor has
faith in your ability to eventually pay the full amount. It follows
that its usually better to negotiate a slow schedule for catching up on overdue debts gradually, and keep your word, than
it is to agree to repay them more quickly and have to ask for
another extension.
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Example:
Mach 7, a motorcycle repair outfit, decided to expand into sales
by becoming the franchise for a newly hot line of Italian bikes.
Investing a substantial amount in building a showroom and training
salespeople, Mach 7 took a big financial hit when its first shipment
of bikes was immediately recalled because of a safety-related
defect that would take two months to put right.
In the meantime, short of friends, Mach 7 badly needed help
from its creditors. To get it, Erin, Mach 7s co-owner, sent a onepage fax to all key accounts, briefly explaining the problem and
the fact that it should be taken care of in 60 days. She then requested
permission to delay payment of all invoices for three months,
promising that if possible she would make a least partial payments
sooner. The next day, Erin followed up with a personal phone call
to all Mach 7s large creditors, during which she said she could and
would pay 10% of what was owed immediately. All were willing
to support her, although several wanted weekly updates on Mach
7s condition, something Erin readily agreed to provide.
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14
Embrace Your Best Competitors
The trouble with the rat race is that even if you win,
youre still a rat.
Lily Tomlin
our spouse, best friend, and nosiest brother-in-law, combined,

probably dont know your business as well as your closest
competitors. Whether you silkscreen t-shirts, import spices, set
tile, or run a gymnastics school, the entrepreneurs who vie with you for
business will closely track your successes and failures. Given that you
often compete for customers, deal with the same suppliers, and promote
your businesses in similar ways, they couldnt ignore you if they tried.
Competitors will also play a significant role in defining your business
reputation. If you set an extremely high standard (the kids in your gymnastics school love what they do and frequently win regional competitions),
you will inevitably earn the respect of others in your field; they may even
have to change the way they operate to better compete with your
successful example. On the other hand, if you run a slipshod business,
your competitors will almost surely enjoy mocking your efforts.
To fully grasp how important earning the respect of your competitors
can be, talk to any established local businessperson in a competitive field,
such as a doctor, house painter, or copy shop owner. Ask her whether
she is able to accurately rank her closest competitors by competence,
integrity, cost, timeliness, and other significant factors. My hunch is that
shell have no trouble doing it blindfolded, standing on her head in the
middle of a hurricane at 2 a.m. In fact, peer-based evaluation systems
tend to be so accurate they are often used as a rating methodology by
academics, consumer groups, and others. For example, the editors of the
book Americas Top Doctors, by Castle Connolly Medical Ltd., start their
rating process by asking tens of thousands of American doctors a very
simple question, To which doctors would you send a member of your
family? Nominees are then separated by specialty and again rated, this
time by teams of doctors in each major geographical area.
Assuming you agree that your competitors are likely to know a lot
about your business, you can be forgiven if you still dont see what this
has to do with my advice to embrace your best competitors. Traditional
small business wisdom, after all, teaches that you should be wary of your
competitors; you may even be coached to treat them as outright enemies.
Much of the rest of this chapter explains not only why this scorched-earth
approach is wrong, but also why a kinder, gentler approach is far more
likely to benefit your business and make your personal life more pleasant.
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EMBRACE YOUR BEST COMPETITORS
Why It Makes Sense to Cooperate With

Your Competitors
In large business, its at least theoretically possible for one corporation to
play hardball so successfully that it largely destroys its competitors. From
the Standard Oil Trust of the early 20th century, through mid-20th century
category-killers such as IBM, Sears, and General Motors, to 21st-century
Microsoft, there are many examples of monopoly-building corporate
strategies that have produced huge profits, at least until government
antitrust regulators or rapidly changing technologies produced new
competitors.
But the rules are different in the small business world. With lots of
providers in most fields, its rarely possible for one company to dominate.
Leaving aside the fact that to do so would mean that a small business
would have to grow large (something that most small entrepreneurs dont
want to do), there are a variety of reasons why a local plumber, Chinese
restaurant, t-shirt printer, or law firm cant monopolize its market. One big
one is location. Customers often choose these businesses precisely because
they are located nearby, so its hard for a big centralized operator to take
over.
Price competition is another big barrier, especially among service
businesses, which all have similar labor costs. For example, if ClipMe, a
local hair cutting salon, suddenly cuts prices in half, chances are that every
other budget hair stylist in town will quickly realize that survival depends
on matching or beating ClipMes prices. The likely result will be that
ClipMes initial increase in volume will dry up and its owner, learning that
in most instances no one wins a small service business price war, will put
prices back to their former levels. Similarly, if Ready T-Shirt announces it
plans to move from a storefront to a large warehouse, install high-speed
silk-screening equipment, and embark on an expensive advertising blitz,
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its local competitors, Graphic Attack, T-Shirt Express, and T-Top are
almost sure to spot the danger early and move to counter it. They may
lower prices even before Ready T-Shirt makes its move, forcing Ready to
similarly slash its pricesand lose the profit margins necessary to justify
an expansion loan.
So while being seen by your small business competitors as running
an efficient, ambitious, and even highly competitive small business is
positive, being regarded as an unfair competitor or business predator is
likely to be counterproductive. And its important to realize that in this
context its often what you say as much as what you do that influences
how others regard you. For instance, Ill never forget the self-help law
publisher whose president bragged to a prominent journalist, Nolo is
history, or the competing software house whose marketing director
loudly proclaimed at an industry trade show, Well bury Nolo. Although
in both instances these executives may have been as guilty of hyperbole
as they were of a real plan to flatten Nolo, we have ever since been
extremely wary of both outfits.
Your Competitors Are Your Natural Friends

With some exceptions, most small business owners who stay the course
have been drawn to what they do by a real liking for the field. And those
who are truly fortunate create a vocation as well as a business. In this
context, I think of several of the small business owners Ive dealt with
recently, including Rick, who gives my softball-mad daughter pitching
lessons; Theresa, who owns and runs an excellent Italian deli; my doctor,
Alan; and Andy, who owns my favorite bookstore. Without exception,
these men and women not only operate profitable businesses, they enjoy
and care about what they do. How do I know? Leaving aside the fact that
Im on friendly terms with all of them (another testament to their business
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acumen), its easy to see how deeply each is committed to his or her
business and the people it serves.
So heres a key question I bet youve never answered: Assuming
there are good people like these in your chosen field, who better to be
on good terms with? After all, in our big, fast, anonymous world, you are
almost sure to have much in common with people who have somehow
been drawn to do the same work as you do, in the same place, and at the
same time. Except for the fact you see yourself scrapping with these
people for your daily bread, at least some might well turn out to be your
friends, if not soul mates. Fortunately, in some fields, such as dentistry,
landscaping, or real estate sales, where there is plenty of customer demand
to support many local providers, its common for competitors to establish
cordial relationships. This is especially likely where a local trade association
such as a county dental association offers competitors a regular opportunity
to meet and greet each other in a social context, where industry veterans
have an opportunity to teach anxious newcomers the long-term value of
civil, if not cordial, relations.
But in some occupationstree trimming, algebra tutoring, or video
production, for examplethere may be no comparable opportunity for
you to mingle with your competitors. Short of starting an organization to
provide these occasions (which can be a great idea), your contacts with
competitors will necessarily be more informal. Depending on your occupation, your paths may cross at a particular wholesale supply company
where your customers gather, at a service club, or just around town. How
you act during these encounters will have much to do with defining your
relationship. Except when dealing with true charlatans, youll want to
make every effort to establish and maintain at least a polite relationship
with all competitors, even those who arent quite your cup of tea. And to
the extent that you can form genuine friendships with your high-quality
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competitors, youll not only reap personal rewards, but, as Ill discuss in
the rest of this chapter, your business will also likely benefit.
Your Competitors Can Be a Source

of Business
By their very size, small businesses are significantly limited in the amount
of work they can handle during any given period. A busy dentist, who on
average treats 40 people per week and reviews a hygienists work on
another 40, has only a very restricted ability to increase these numbers. If
too many patients call in too short a time, some will have to be put off
until later or, especially in the case of new patients, referred to another
dentist.
And, of course, its not only a work overload that leads one small
business owner to refer customers to a competitor. In an age of increased
specialization, the exact specifications of the task often play a huge role in
a businesspersons decision to accept work or refer it to someone else. For
example, Bills Pruning may prefer to do high-volume jobs on hedges and
small trees up to 30 feet, while sending more complicated and potentially
dangerous tall tree jobs to Way-Up Tree Care, which as its name implies
specializes in caring for sky huggers. True, the two companies compete to
trim medium-sized trees and, in periods where business is in short supply,
may further invade each others vertical space, but most often they find
mutual advantage in referring customers back and forth to fit each others
preferred customer profile.
And, of course, its not only dentists and tree surgeons who frequently
refer customers to their competitors. Every busy small business will, at
least occasionally, need to do the same, if for no other reason than to be
able to meet the needs of their established customers. True, referring an
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existing or potential customer to a high-quality competitor risks the

persons never coming back. But making an excellent referral is not nearly
as problematic as is sending a good customer to a marginal business
where they are likely to be disappointed, both by the service they receive
and the bad steer you provided.
Example:
Jeannie, who is helping plan her daughters wedding, calls Pour
Vous, a local caterer, on the recommendation of her friend Millie,
one of Pour Vous best and most regular business customers. Pour
Vous is already fully booked for the date of the wedding, so
Jeannie asks Tad, Pour Vous owner, to recommend another
caterer. As a savvy businessperson, Tad immediately understands
that he has a lot riding on the success of his recommendation. If
Jeannie is satisfied by the caterer Tad suggests, Millie and probably
others Jeannie talks to will hear about it. But if the second caterer
turns out to be a bust, Jeannie will let Millie know all about it and
at least some of the discredit is sure to rub off on Tad. So Tad recommends Good Hands, a business he considers to be thoroughly
reliable. And a few days later he calls Deb, Good Hands owner,
to be sure she realizes where the referral came from. Fortunately,
Good Hands lives up to its name, and a pleased Jeannie tells
Millie all about how successful the reception was. As a result,
Millie emails Tad her thanks and asks him to begin planning to
cater the big Christmas party.
A year later, when Jeannie needs to plan her 30th anniversary
party, she understandably sticks with Good Hands. But two years
later, after Deb has closed Good Hands to go back to school,
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Jeannie remembers how nice Tad was and hires Pour Vous to
handle the catering for her youngest daughters wedding reception.
Working for Your Competitors

In many fields it is common for independent businesspeople to work at
least part-time for one another. This is especially likely when a new
business is in the start-up phase. So a freshly minted CPA who opens her
own tax preparation service, but as yet has a short roster of clients, may
contact several established accounting firms to see if part-time work is
available during the tax season rush. Or an independent carpet installer may
work two days per week for a floor covering megastore, while devoting
the other three to establishing an independent carpet-laying service.
To make these sorts of relationships work typically takes patience,
discretion, and good judgment by everyone involved, but particularly on
the part of the new entrepreneur who, after all, is in the weaker bargaining
position. Until proven otherwise, the established businessperson is likely
to worry that the upstart may try to steal customers or clients. This explains
why the independent businessperson is often asked to handle only the
bits and pieces of jobs that require little or no customer contact.
But if, over time, the freelancer is smart enough to demonstrate that
he or she is not a client poacher, the established businesss defensive
attitude will typically relax. The established business may even begin
sending the new business some of the very same accounts it was initially
protective of. Although this first paranoid, then generous behavior may
strike you as bizarre, in fact it makes sense. Thats because by the time
the referral actually takes place, the established business owner has had
ample time to judge the upstarts work and character. Assuming both
prove outand given the new entrepreneurs clear determination to
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establish her own businessthe established business owner may sensibly

conclude that over the long term it will be more beneficial to maintain
cordial and cooperative relations than to compete tooth and claw.
Your Competitors Will Help Define

Your Reputation
Most small businesses that prosper over the long term do so in significant
part by bringing in new business through the positive recommendations
of existing customers. (This is discussed in Chapter 8, Market Your Business
Creatively.) It follows that establishing and maintaining an excellent
community-wide business reputation will be one of your best tools to
garner new business.
But your reputation wont be defined only by your customers and
others in your day-to-day network, such as your employees, contractors,
suppliers, and neighboring businesses. Your competitors will have a great
deal of power to define how others regard you. For example, if yours is a
field occasionally covered by local media, the reporter who profiles your
business will almost always check out your reputation with others in your
field. Journalists know from experience that this is one of the simplest and
most effective ways to find out both good and bad things about your
enterprise. For example, once, several years ago, when a reporter doing a
profile on Nolo called a competitor whom I had not been particularly
cordial to, the quote he got was Warner is often an insensitive red-hot,
but I have to give him credit for running an excellent company. Realizing
that this feedback could have been far worse, I resolved to be a little nicer
to my competitors in the future.
And, of course, the prospect of positive media coverage isnt the only
way your business can benefit by being well thought of by your competitors.
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Before making a decision to patronize a particular business, potential customers often check it out with someone in a closely related field.
Example:
Marcus, realizing its time to take his two-year-old to the dentist,
asks one of the other parents at Playtime Childcare to recommend
a childrens dentist. He receives a strong recommendation to Dr.
Yamaki. But then, realizing that he doesnt know the recommender
very well, Marcus decides to check out the recommendation with
his wifes adults only dentist. When this dentist says, You couldnt
do better, Marcus makes the appointment for his daughter.
If You Cant Say Something Nice

If you are new to the small business world, you probably do not fully
realize just how frequently you are likely to be asked to express your
opinion about your competitors. To see how this might work, assume you
own a small interior design business. Here is just a partial list of the
questions you might be asked about one of your competitors.
A potential customer may directly ask, What do you think of
Design Associates work?
Your sons teacher may tell you of a bad experience she just had
with Design Associates as part of asking your opinion as to how
she should proceed.
A vendors representative or someone else in your field may give
you the latest gossip about Design Associates, as part of a
conversation where youre expected to comment.
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A consumer or industry rating service may contact you to check

up on Design Associates.
You may be interviewed by a reporter from a trade publication
or the general media about Design Associates.
Someone who used to do freelance work for Design Associates
may ask you for work and in the process express an opinion
about Design Associates.
On these and similar occasions when you are asked to express your
opinion about Design Associates, one rule (a version of the Golden Rule,
really) should apply: If you cant say something nice about a competitor,
keep your mouth shut. There are many reasons to avoid starting a pissing
match with people in your field, the most important being that even a few
competitors who are highly motivated to do you harm can hurt your
business and try your soul in many ways. Far better to plan to avoid this
eventuality, even if it occasionally means being pleasant to people you
dont like.
So if you talk about a competitor, be charitable. Secretly, you may
think the person sometimes speeds through jobs, charges too aggressively,
and often finishes late, but unless he is an out-and-out crook, keep your
negative opinions to yourself and accent the positive. Although nice words
will never travel as far or as fast as negative ones (especially those imparted
to close friends in deepest confidence), eventually your competitor will
hear them. And, hopefully, the next time she has a chance to blast or praise
your business, shell be equally well mannered. And even if she isnt, you
will still want to continue to avoid mud slinging. In the long runand
possibly even in the near termyour reputation as a fair-minded person
will go up, just as that of your mean-spirited competitor will surely decline.
What should you say when asked about a seriously bad or fraudulent
competitor? Especially if youre queried by a friend you dont want to
mislead, it can be tough to come up with an honest, but nevertheless
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diplomatic, answer that doesnt risk starting a war. Ive found that pausing
before changing the subject usually conveys the message loud and clear,
without loosing negative words on the local universe to rattle around for
years to come. Another approach is to say that as a matter of policy, you
dont give opinions on people in your field, but you can explain the
criteria you use to judge a good business. This might include a good
educational background, on-the-job experience and training, offering a
money-back guarantee, or a particular excellent method of doing business.
With luck, the information you provide will arm the person you are talking
to with enough information to make an independent judgment about a
business that probably doesnt meet many of these criteria.
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15
Dont Buy a Franchise
The only thing that saves us from bureaucracy is its

inefficiency.
Eugene McCarthy
omedays its hard to turn on the TV without seeing ads profiling

ecstatic lottery winners. The ads doubtless sell lots of tickets,
despite the fact that most viewers surely know that their chances
of winning gigabucks lie somewhere between infinitesimal and nonexistent.
The business of selling franchises is eerily similar. Glib salespeople
typically profile franchise owners who retired rich just 42 short months
after purchasing an Ace Rug Cleaning Service or a Zesty Avocado Burger
outlet. Assuming these people really exist, I can confidently tell you that
your chances of being like them arent much better than those of winning
$20 million in the SuperLotto.
Almost every franchise presentation emphasizes that nationwide,

franchised businesses take in about 50% of the retail sales dollar. What
isnt said is that the great majority of these dollars come from just a few
categories: automobiles, gasoline, lodging, and fast food. Beyond these
megabuck fields, only a small percent of the money retailers take in goes
to franchised operations.
Franchises That Are Good Deals

Although Ive become convinced that purchasing a franchise is generally a
poor way to start a business, let me start with a couple of exceptions to
my own rule.
The first involves franchises built around continent-spanning
communication networks such as national hotel and motel groups, which
maintain 800 phone numbers and websites allowing travelers to easily
book reservations. No question, if you plan to be in five cities in five
days, booking your bed, car, or perhaps even some of your meals via one
or more of these national systems is very attractive. This is not to say, of
course, that any particular hotel, motel, or auto rental franchise is a good
deal, only that unlike many other franchises, they do sell something of
real value.
Second, franchises with brands that really are famous and highly
regarded can sometimes be worth the high cost. Franchisees, especially
those who bought in years ago at good locations, have made big profits
in McDonalds, Pizza Hut, Motel 6, and other world-famous franchises. But
it has been decades since an ordinary person could afford to purchase
and build out one of the relatively few gilt-edged franchises. Typically, an
investor with $50,000 or less ends up with a garage full of low-end
vending machines or a couple of panel trucks whose sides are emblazoned
with ads for a third-tier rug-cleaning service.
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DONT BUY A FRANCHISE
The Problems with Franchises

The biggest problem with many, if not most, franchise operations is
depressingly simple: They charge too much for a business that doesnt
have enough value to justify the high upfront and ongoing costs. To help
understand why this is true, answer these three simple questions:
How hard is it to make a sandwich?
How hard is it to clean a house?
How hard is it to put grout in tile?
If your answer is not very, then I have another question for you.
Why pay a franchise operator a large sum to teach you how to do one of
these or other simple tasks when you could learn to do it on your own
for far less?
Franchisors say there are at least two good reasons to buy a sandwichmaking, housecleaning, or other run-of-the-Yellow-Pages franchise. First,
they almost always claim to have developed wonderfully efficient new
techniques that have all but revolutionized the business. If youre that
gullible, you would probably be investing your money in the nearest slot
machine, not reading this book. In truth, although some franchise sandwich shops may serve a decent meal, they have not somehow invented a
revolutionary way to put meat, cheese, and veggies between two hunks
of bread. And there is no rug-cleaning franchise that really can show you
how to clean all types of rugs twice as well in half the time. In both
instances, their cleverest techniques are usually in the area that interests
them most: separating potential franchisees from their investment dollars.
And their amazing new methods are little more than a combination of
common sense and heavy sales hype.
Most franchisors second big sales pitch is designed to convince you
that XYZs 50-state marketing plan is all but guaranteed to make your
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franchise business the McDonalds of its field. The point here seems to be
that if they can convince you, they will hype the hell out of whatever XYZ
sells, and youll want to buy in and rake in the dough when the franchise
inevitably becomes famous. But few franchisors ever spend enough
marketing money to make a significant impact on the consciousness of
the American public. And even if they do, people wont continue to
patronize a business unless its well designed and run. For every franchise
operation that has become widely recognized, dozens have struggled and
failed, all but unknown except to the people whose investments have
similarly disappeared.
Lest you think I exaggerate, consider that few bankseven those
that make many small business loanswill lend money to buy a franchise
without receiving a security interest in real estate or the personal guarantee
of a highly solvent person. They have learned the hard way that lots of
these businesses fail, meaning their chances of not being repaid are
unacceptably high.
Franchises Cost Too Much for What You Get

A huge part of all franchise sales hype boils down to we can make it
easy for you. Not only can we show you how to wax a floor, clean a rug
or make a falafel quicker and better, but we will also explain exactly how
to buy all the whizbang equipment and supplies needed to do it (in fact,
well be happy to sell them to you). In short, the franchisor promises to
provide you with a turnkey business operation that will allow you to skip
all the boring start-up details and begin to make money immediately.
Franchisors also emphasize that if you buy in, youll instantly be part
of a well-known and highly respected marketing organization, something
you could never achieve on your own. That is, instead of being Joes
Housecleaning Service, youll be part of the world-famous Scrub n Shine
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network. And the right to use the Scrub n Shine name isnt all youll receive. Youll benefit from Scrub n Shines sophisticated marketing effort
that will all but guarantee youll have a small army of customers knocking
down your door to hand you money.
The reality is usually far less exciting. First, youll pay an up-front
franchise fee, which might be $30,000 to $70,000 or more for a littleknown housecleaning service. A well-known restaurant or hotel franchise
will have a price tag in the millions when you figure the costs to construct
the required facility.
Typically, youll also be required to pay the franchisors 3% to 6% of
your monthly gross revenue (big-name fast food operators, such as
Wendys, McDonalds, Burger King, and Subway typically charge between
8% and 11.5%), plus a few cents on the dollar for the franchisors marketing effort. Put these fees together and it means that in addition to paying
the up-front fee for the franchise, you will usually have to pay the
franchisor six to ten cents or more of every dollar of revenue. And if the
franchisor requires that you buy goods or services either directly from it or
from an approved supplier, your costs will probably be higher, because
franchisors commonly charge substantially more than do suppliers on the
open market. Lets assume that the extra costs would amount to two cents
out of every dollar of revenue.
Add it all up, and youll likely pay the franchisor ten cents of every
dollar you take in (more for many fast-food franchises). This is a huge
burden to your long-term profitability. But wont a high volume of sales
more than compensate for these costs? Consider that the entire profit
margin of many small businesses is less than ten cents on the dollar, and
few businesses do much better.
And, of course, your franchise fees dont get your business open. If
you want to open a business that has a high start-up cost, such as a
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restaurant, youll still need to build or remodel a physical space, purchase

equipment, and train employeesthings that are usually more expensive
when you must conform to a franchisors many specifications. For example,
opening a typical upscale bar and restaurant costs between $2 million and
$3 million.
But if you dont get a leg up from a franchisor, how will you get the
knowledge and skills you need to open a successful business? Chances
are you can learn on your own for free. For example, if you are interested
in opening a lock shop, nail salon, or copy shop, get a job in one for a
few months instead of buying a franchise. Not only will you learn much
about how the business works, but youll be paid to do it.
Example:
Joan, a retired Coast Guard officer, always dreamed of opening a
bookstore. Casting around for how to make it happen, Joan
discovered that she could buy a turnkey franchise that promised
to teach her everything she needed to know to stock and run a
bookstore. But before Joan invested, she decided to learn more
about the business by getting a job at the local Barnes & Noble
chain bookstore. After four months, she moved over to her areas
most successful independent store. After six months clerking
there, Joan clearly understood two things. First, she had already
learned most of the information the bookstore franchise proposed
to sell her. And second, because margins were low and inventory
requirements high, making a profit selling new books is extremely
difficult, something thats only likely to get worse as more and
more customers order books online.
Joan decided to take a very decent job running the book and
gift shop at a nearby planetarium. Her salary, plus her Coast
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Guard pension, would be more than enough to continue expanding her collection of 18th- and 19th-century English literature,
books she had already begun buying and selling at a profit on
eBay.
But what about all the benefits of the franchisors marketing efforts?
Dont hold your breath. National franchise outfits rarely do a good job of
promoting their local franchises, in part because they typically rely on
broadcast and print media campaigns, which for small businesses are
usually an inefficient way to use precious marketing resources. Even
worse, because franchisors are usually headquartered outside a franchisees
area, they are not equipped to implement the many types of low-cost
local marketing that can be extremely effective. (See Chapter 8, Market
Your Business Creatively.) Add to this the fact that most smaller franchises
never have enough money to buy more than a token amount of media
exposure and youll understand that Scrub n Shine is unlikely to ever
become a household nameand even if it does, you probably wont
benefit.
Youll Be Bored
To many prospective purchasers, the big appeal of buying a franchise is
that someone else has figured out how to run the business. Just pay your
money, and the franchisor will explain in great detail exactly how to
make a donut, wash a car, or sell sneakers. Often overlooked is the fact
that operating a business by following an instruction manual can also be a
big negative. Instead of having a chance to exercise your creativity and
imagination to improve and change your products and services, youll be
sentenced to endlessly repeating someone elses recipe. Another way of
saying this is that the franchise will never really be your business at all
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instead, youll be little more than a sharecropper working for an absentee

owner who retains the authority to make most key decisions. True,
recognizing this huge weakness, a few franchisors encourage franchises to
experiment with new products and techniquesbut if you are going to
do that, why not just work for yourself from the start?
Some people think they wont mind running a boring, uncreative
business as long as its solidly profitable. Maybe. But the truth is that you
are prevented from actively using your intelligence and creativity to adjust
the business to fit local circumstances or take advantage of what you
learn, which is almost sure to make the business less likely to succeed. Or
put more bluntly: Run a dumb business, get a dumb result.
To help see why a paint-by-the-numbers approach is a poor way to
run a business, compare any large franchise operation to other hierarchical
bureaucracies where key decisions are made at the center and then
communicated to and implemented at the periphery. Whether your model
is the IRS, Poland under the Communists, or any one of dozens of onceprosperous multinational corporations such as AT&T, Sears, or Xerox, I
think youll quickly see that inefficiencies inevitably creep into these topdown systems. Especially when it comes to providing local services, sooner
or later the best small, nimble operators run circles around centrally
planned behemoths. Both the fun and profits in the small business world
tend to go to entrepreneurs who learn how to operate lean, innovative
businesses able to adjust to changing local conditions. People who buy a
business formula and never deviate from it rarely become wealthy or
achieve the sense of fulfillment enjoyed by entrepreneurs who work long
and hard to succeed at their own enterprises.
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The Contract Is Stacked Against You

Franchise contracts, which typically run 50 pages or more, are written and
rewritten by skilled lawyers to be sure the franchisor remains firmly in
control of the relationship. Like buying a car or an insurance policy, you
have no chance to negotiate a change to even one word of these agreements, which by itself should tell you all you need to know about the
one-sided nature of your future relationship. Here are just a few of the
ways the fine print of these contracts benefits the franchisor:
Competition and noncompetition. Most agreements allow
franchisors to sell as many franchises as possible wherever and
whenever they wish. So if your business does well, the franchisor
can probably brag about your success to sell another franchise to
someone in your immediate area. For example, a quick Internet
search tells me there are 60 Starbucks locations within ten miles
of my Berkeley, California, house. At the same time, should you
wish to close the franchise and open a similar independent
business, you are typically prohibited from doing so for at least
three to five years. Or put another way, even if you want to quit
the franchise and go into business for yourself, you cant.
Approval of sale. To sell your franchise sometime in the future,
youll probably have to get the franchisors approval. Not only
can this make the sales process more difficult (the franchisor
might reject a purchaser you consider well qualified), but it means
the prospective purchaser will have to agree to the terms in the
then-current franchise contract. If, as is common, royalty fees and
marketing expenses or other costs have been raised significantly
since you bought in, your franchise could be all but unsaleable.
Resolving disputes. If you get into a legal dispute with the
franchisor, the franchise agreement may require that you file your
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lawsuit on the opposite side of the country, and be subject to the

law of the state whose courts are most favorable to franchisors.
The old Mexican curse, May you have a lawsuit in which you
know you are right, is likely to come to mind.
Purchasing goods and services. Many franchisors require that
you buy supplies, goods, and even services, such as marketing
and advertising services, from the franchisor. Although this
sometimes makes sense (all chicken sold at Big Bens Bird House
should look and taste the same), often its just another way
franchisors take money away from franchisees. The obvious
problem is that when you agree to buy goods or services from a
single provider, you dont get the benefit of the normal competitive marketplace and so almost always pay too much.
Example:
FrostiFruit, a franchisor of frozen fruit concoctions, charges all of
its franchises 4% of gross monthly sales as a royalty fee and an
additional 3% to participate in a mandatory centralized marketing
plan controlled by FrostiFruit. Candy, FrostiFruits president and
principal stockholder, sets up an ad agency, Candy & Associates,
to handle systemwide advertising, paying herself a generous salary
as agency president. FrostiFruit hires Candy & Associates to do all
its advertising. As long as the agency does a reasonably competent
job placing ads, the courts of many, if not most, states would find
nothing wrong with Candys feathering of her own nest. And this
would be true even if a local franchisee could prove that it could
pay half as much for a far more effective local ad campaign.
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Evaluating a Franchise
Even after reading my anti-franchise arguments, you may remain convinced that a particular franchise really does have such a valuable name
and reputation that buying in may be a good deal. Despite initial fee and
ongoing royalties and marketing costs, you are sure that if you can run
the local Subway sandwich shop, 7/11 convenience store, or Sir Speedy
printing center, youll do extremely well.
If thats so, I recommend you go through this step-by-step process to
investigate the business and its prospects before you write your check.
Get the Franchises Circular

Your first step should be to ask the franchisor for a copy of its Uniform
Franchise Offering Circular (UFOC). This is a federally mandated document
that contains loads of information about the franchise companys history,
operations, franchise network, rules, and costs. Read it extremely carefully. And if you have limited business experience, ask a friend with a
successful business to review and discuss it with you.
Further information on franchises.

The Legal Guide for Starting & Running a Small Business, by Fred
Steingold (Nolo), contains a useful chapter analyzing the UFOC,
as well as other legal issues having to do with purchasing and
running a franchise.
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Talk to Franchisees
If you talk to a number of people who already own a franchise in the
outfit you are attracted to, I can virtually guarantee youll learn many very
interesting things the salespeople somehow never told you. The UFOC lists
(see Item 20) existing franchisees and will tell you whether the system has
grown or shrunk over the last three years. Obviously, if you learn that the
franchise operation is shrinkingor if its too new to have a history
youll just want to say no. There is little reason to pay for a system that
hasnt proved itself.
If the franchisor suggests that you talk to particular franchisees, dont
bother. One way or another, these people are part of the franchisors sales
team and are unlikely to give you fully objective information.
Ask whether there is an association of franchisees. If so, contact this
group and ask for an objective assessment of the franchise. Also check
out the list of franchisees who have left the system in the last year, and
call some of these people.
Look at All the Costs

Carefully study Sections five and six of the UFOC for answers to these
questions:
How much is the upfront franchise fee?
How much money do you have to pay the franchisor by way of
a monthly fee, often called a royalty? As noted, this will often be
3% to 6% of your salesnot your profitsbut can be much
higher. (Subway charges as much as 11.5% of sales, according to
the December 24, 2001, issue of Forbes.) With most franchises,
even if you are operating in the red, you must pay this fee.
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Is there an additional marketing or advertising fee? If so, how

much is it?
Are there other fees for such things as travel, training, audits, and
attorneys?
Do you have to buy equipment or supplies from the franchisor?
If so, how much cheaper could you buy them from an industry
wholesaler or even at the local warehouse club?
How much will it cost you to actually get into business? If youll
have to construct a building and buy equipment, it could be
several hundred thousand dollars or, in the case of a fancy
restaurant or hotel, many millions. Youll find the franchisors
estimate in Item 7 of the UFOC, but of course this wont include
all your time, effort, and worry (that without the franchise, could
likely be turned to other profit-making pursuits). And also
remember this number doesnt include your operating costs
during the start-up period, when business may be so slow it
doesnt cover your costs.
Find Out About Recent Lawsuits Against

the Franchisor
You want to know whether or not any unhappy franchisees have sued
the company recently. Any such lawsuits should be listed near the beginning of the UFOC. If you find a history of litigation, contact the people
involved to get their side of the story. Or, if the case was decided by an
appeals court where a formal court opinion was written and published,
find out what the judge had to say. (You can find court opinions in a law
library or, in many instances, on the Internet. For help with online legal
research, see Nolos Legal Research Center at www.nolo.com.) For example,
a few years ago, a federal appeals court ruled that it was legal for
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Meineke Mufflers to set up its own in-house advertising agency and hire it
to handle franchise system advertising, in effect ensuring itself millions of
dollars in fees to handle franchise advertising. (Broussard v. Meineke
Discount Muffler Shops, 155 F.3d 331 (4th Cir. 1998).)
Check Out the Competition

Open the local phone book and count the competitors in the particular
market niche. In any popular field, chances are there will be a number of
other competing franchise operations, as well as many independents. Personally visit or patronize a number of these businesses. Do the franchise
operators really have an advantage over the well-run independents? How
hard would it be to set up on your own?
Analyze Your Options

Finally, compare the cost of a franchise to the cost of opening and
operating a similar independent business for a year. I suspect that youll
conclude that its much cheaper to go it alone. If, for example, you would
save $50,000 by operating independently, pretend you invest this money
in United States bonds and leave it there until you retire. Depending on
your age, it will double, triple, or, if you are young and leave it alone for
many years, do even better. Obviously, it makes sense to invest in the
franchise only if you are pretty sure you would earn more than you
would take in running an independent business plus your annual investment income.
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16
Sell Services, Not Goods
Business without profit is not business any more than

a pickle is a candy.
Charles F. Abbott
n a Wal-Mart world, its usually tough to succeedor even survive

by retailing most kinds of goods. Whether its clothing, hardware,
sporting goods, pet food, or almost any other physical object, unless
you operate in a niche so tiny the big players cant be bothered with it,
competition from hypermarkets and other mass retailers will typically
force you to set prices too low to make a decent profit. As thousands of
struggling retailers have noticed, the big box stores, because of their huge
market clout, often can sell stuff cheaper than the small guys can buy it.
By contrast, in an age where time is the most precious commodity,
its relatively easy to prosper by selling any one of a huge variety of helping services to individuals or businesses. Depending on the level of local
competition, you can normally earn a very good living unclogging toilets,
strengthening teeth, doctoring feet, laying tile, teaching kids advanced
sports techniques, or providing any of a thousand other types of help. As
long as there is a real demand for the type of assistance you provide, and
it cant realistically be delivered long distance from a low-wage county,
you normally have a great opportunity to establish and defend a robust
profit margin.
To illustrate why its far easier to succeed selling locally provided
services than selling physical items, here is a short list of people I know
whose businesses are solidly profitable:
Wendy, whose four-person business designs and maintains upscale gardens
Ted, whose eight-person company installs, replaces, and fixes
electric garage-door openers
David, who is working with his partner, Wilbur, tutors high
schoolers preparing for SAT exams
Roy, whose three-person business repairs and replaces masonry
fireplaces
Cecily, whose small law firm (three partners, two staff) helps
small businesses cope with employee-related problems
Ling, whose family runs a photography business that specializes
in childrens school, church, and sports-team portraits
Kyle, whose one-person business teaches batting skills to young
women who play fast-pitch softball, and
Andrew and Sid, who own an antique shop specializing in 18thand 19th-century furniture.
Now here is a second list of business owners I know who are doing
markedly less well:
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SELL SERVICES, NOT GOODS
Faith, who runs a boutique dress shop with the help of four parttime employees
Paul, whose independent bookstore employs two full-time and
two part-time employees
Ali, who retails TV and consumer electronics and repairs bigscreen TVs (90% of his profits come from the repair business)
Helga, who operates a three-person ice-skating equipment store
(fortunately, Helgas second business, teaching people to skate, is
profitable), and
Jos, whose futon shop barely survives despite the poorly paid
help of several long-suffering family members.
Interestingly, the only successful business that exclusively sells
tangible items is the antique shop. It does well because it focuses on oneof-a-kind items not sold by major retailers. Even more telling, all the less
successful businesses are retailers. Of course, not every service business
prospers, and not every retail shop struggles. Loads of factors, including
consumer demand, marketing savvy, location and, often most important,
the proximity of low-price competition have a lot to do with whether a
particular enterprise thrives or withers. Nevertheless, the trend away from
being able to make a decent living selling goods is both strong and
inexorable. It began way back in the mid-19th century with the advent of
mass-produced consumer goods, and has accelerated ever since the large
discount chains opened after World War II. Today the marriage of superefficient, computer-driven, just-in-time inventory systems to low-cost but
highly reliable foreign production has produced goods that are actually
becoming both cheaper (in inflation-adjusted terms) and better quality.
Certainly there can be little doubt that many, if not most, Americans
prefer to shop at the huge low-cost megastores that have all but taken
over the retail environment. If you doubt it, walk along the main street of
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any American town or small city a year or two after Wal-Mart, Home
Depot, Staples, or other big box retailers move into the area. Despite the
best efforts of many established retailers to defend their traditional markets,
you are almost sure to find many empty storefronts. As discussed later in
this chapter, unless yours is a niche business specializing in products not
available from the big players, such as antiques, luxury goods, or crafts,
you are not looking at a future you want to be a part of.
By contrast, most service businesses have great potential to do well.
Overbusy Americans are increasingly likely to buy help with all sorts of
tasks. And most service businesses, which have the great virtue of being
cheap and easy to start, are all but immune from the scorched-earth price
competition so common in retail business. The exception, of course, is
services such as telephone order taking and software development, which
are easily amenable to being transferred to low-wage countries.
You Can Keep Start-Up Costs Low

Its often possible to get a highly profitable service business up and running with little up-front investment. The millions of people who have
started one of these businesses from their homes, or in low-cost offices or
warehouses, prove the point. For example, one highway engineer I know
has run a one-person consulting business from his home for over 20 years;
he has never netted less than $100,000 per year and often considerably
more. And a freelance paralegal who very profitably handles the legal
research needs of half a dozen small law firms from the corner of her
bedroom often makes as much as they do.
A quick comparison between two animal-related businesses, one that
offers services and one that sells products, illustrates this point. To open a
pet supply store, Penny must rent a physical space, buy or lease equipment,
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purchase a wide variety of insurance, buy inventory, and hire employees,

to mention just a few of her larger expenditures. By contrast, Philip, who
catches and relocates raccoons, skunks, and other small animals that have
become a nuisance to suburban homeowners, can start his business with
a couple of dozen live traps, a Yellow Pages listing, some cat kibble, and
an answering machine.
In many instances, retailers pay so much for a prime location that its
difficult to make a decent profit even when sales are strong. By contrast,
your electrician, plumber, garage-door repairperson, and dozens of other
service providers are probably headquartered in low-cost digs so far off
the beaten path that youve never visited them. And, of course, the millions
of consultants, tutors, Internet-centered resellers, and others who work
from home pay little or no rent. Even many dentists, doctors, accountants,
lawyers, and other professionals whose clients expect them to operate
from appropriately professional locations find that their rent consumes
only a smallish fraction of their gross income. In part this is because the
ones with the best business smarts have learned that customers prefer to
visit functional, rather than fancy, offices, and value practical things like
free or affordable parking far above a faux-marble lobby or Persian carpet.
After all, if you hire a business lawyer for your small business, do you
really want to be billed an extra $50 per hour to cover the cost of the firms
penthouse suite?
Example:
Josephina decided to locate her law firm in a small but tasteful
office complex on the edge of a light industrial area, rather than
paying twice as much for space in the new professional building
downtown. Before inking the lease, Josephina and her partners
even got the landlord to trade a small but significant portion of
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the rent in exchange for legal services. The result was a yearly
rent bill of only $50,000, not bad for a small firm that expected to
bill about $700,000. By contrast, if Josephinas firm had located in
the new professional building and negotiated no discount in
exchange for services, the rent would have been close to
$150,000.
Even service businesses such as car repair shops or dry cleaners,
which do need to rent easily accessible space, still usually spend far less
on overhead than do most retailers.
Example:
Don, an experienced car mechanic, dreamed of running his own
business to repair luxury cars. Recognizing that the local Lexus
dealer charged high prices for average service and that there were
plenty of older, out-of-warranty Lexus cars in the area, Don
sensed an opportunity for an independent garage charging less.
Having very modest savings, he looked around for a relatively
low-cost location from which to operate his new business. His
hope was to rent a corner of an existing garage and pay an additional monthly fee to use its sophisticated diagnostic equipment.
(Like most mechanics, Don already owned his own hand tools.)
Unfortunately, every one of the 15 or so local garages that had
good facilities and equipment turned him down. Then, just as he
was planning to look further afield, Don got a call from Vincent,
the owner of one of the first repair shops he had visited. It turned
out Vincents partner had just been diagnosed with cancer, and
Vincent suddenly faced the prospect of buying him out and running the business alone. Renting part of the garage to Don was
now attractive, and the two men quickly struck a bargain.
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Now Don needed customers, and he needed them pronto.

Instead of following more conventional marketing techniques,
Don wrote a personal letter to Lexus owners announcing his new
repair service and explaining why he believed he could do a great
job for them. His next problem was how to deliver his messages
effectively. An early morning jogger, Don tucked his letter under
the wipers of literally hundreds of cars as he made his morning
rounds. In addition, he hired school kids to distribute his flyer at
several upscale shopping areas on weekends. Almost immediately
Don got his first customers. With every repair job for a new
customer, he included an elegant stainless steel, lidded beverage
cup with a note thanking the customer and mentioning that as a
new entrepreneur he would appreciate referrals. Before long,
Dons small operation was making a profit.
Not every service business, of course, can be started or operated
cheaply. If you want to open a car wash or instant printing operation,
obviously you wont be able to do it from a spare bedroom. But even if
youll have to purchase or lease machinery and your rent approaches that
of a similarly sized retail operation, youll still have one big cost advantage:
no need to pay to stock an inventory of expensive merchandise. You can
tie up a lot of money in inventoryand if your stock is less popular than
you had hoped, it will be a long time (if ever) before you get that money
back.
You Can Keep Marketing Costs Low

When my younger daughter was facing the dreaded college board examinations (SATs), I looked around to find her some help in preparing. I had
heard negative reports from older kids who had worked with a couple of
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national test preparation chains, so I hunted for a smart, experienced

person to coach my daughter, one-on-one. I started and, as it turned out,
quickly ended, my search by calling several friends whose bright children
were a year or two older than my daughter. When all three highly recommended David, a local SAT tutor, I immediately called and booked a
series of sessions. A few months later, after my daughter aced the exams,
I passed Davids name along to other parents. When, the next fall, word
spread that she had been accepted at an excellent college, I received
several more calls from parents of high school sophomores and juniors
asking for tips. Again, I highly recommended David.
The point of this little story is obvious. David, like so many other service providers, gets most of his new customers from the recommendations
of existing ones with no need to advertise. Combine this with the fact that
like many other service providers, Davids overhead costs are low, and
the happy result is that almost all of his $60 hourly fee plummets straight
to his bottom line. The result is that if David works 40 hours per week, he
both grosses and nets substantially more than $100,000 annually. Not bad
for a business whose principal physical asset is an eight-year-old answering machine.
If you are selling a skill thats in demand, positive word of mouth
about your business can be all or most of the cheap and powerful marketing fuel you need to power your small service enterprise. But how do you
get your business talked about in the first place? When you first open
your doors, obviously you wont yet have any satisfied customers beating
the drum for you. To get your marketing tom-tom started, youll want to
do many of the things discussed in Chapter 8, Market Your Business
Creatively. But a crucial point bears emphasis here: As long as the service
you provide is needed and you do an excellent job, there will be many
cost-effective ways to attract customers. And since marketing a service is
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almost always a contact sport, youll surely have many opportunities to

use your own efforts and energy to spread the word about your business.
Example:
Tomiko opens a legal document preparation service specializing
in helping people prepare the paperwork for uncontested divorces,
bankruptcies, guardianships, and other routine legal matters. As
part of developing her marketing plan, Tomiko follows the advice
in Chapter 7, Target Your Customers, and asks: Who are the
people most likely to purchase my services?
For divorces and bankruptcies, Tomiko decides her prime
targets are younger adults of limited financial means. By contrast,
for guardianships, Tomiko sensibly concludes that her target
market is largely made up of grandparents who suddenly find
themselves raising their kids kids when the parents cant.
To best serve the people in these target audiences, Tomiko
opens a small office in an older, but still respectable, office building
easily accessible to lower-middle-class and working-class neighborhoods. She then creates several flyers describing her legal document preparation services and has them translated into Spanish
and Vietnameseafter English, the most common languages
spoken in her area. Drawing a 20-mile circle around her office,
Tomikos next step is to hand-carry her materials to the social
services and other helping and counseling organizations from
which her target customers might seek help. At each place she tries
to talk to the frontline people most likely to come in contact with
people who have divorce, bankruptcy, guardianship, or other legal
problems. Here is a partial list of the groups and organizations
Tomiko contacts:
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public library reference librarians

legal services (legal aid) offices
battered womens shelters
immigrants help organizations
law librarians at courthouses and law school libraries
community services referral agencies and directories
marriage counselors and family therapists
court clerks
Gray Panthers and other senior advocacy organizations
Parents Without Partners and other singles groups
womens organizations, and
the local military base, (especially the Judge Advocate
General law office).
In addition, Tomiko prepares a press release describing her
new service and why it represents such a powerful and effective
way for people who cant afford to hire a lawyer to gain affordable
access to the legal system. She sends it to a long list of local print,
broadcast, and Internet media, including those that reach Spanish
and Vietnamese speakers. With the help of an experienced
freelance publicist, she follows up a few days later and arranges
for several interviews about her much-needed service.
You Can Set Prices at Profitable Levels

Unlike most retail and small manufacturing businesses, service businesses
enjoy the huge advantage of being able to establish and maintain prices at
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a profitable level. As mentioned, instead of having to compete with the

21st-century retail juggernaut, which typically links highly efficient, lowwage foreign manufacturing with computer-driven, football-field-sized
stores, most service businesses are by their nature locally based and laborintensive. Because people in Thailand or Guatemala are obviously not
available to unplug sinks or toilets in Scarsdale, Sacramento, or Santa Fe,
this means that a typical service businesss competitors are almost always
other local enterprises that must pay wages on an American scale. True,
in a few low-skill fields, such as lawn maintenance and house cleaning,
recent or even illegal immigrants willing to work cheap may drive down
prices, and in a few others, work can effectively be done from overseas,
but for the most part, skilled service businesses are remarkably free of
low-wage competitors. Even when youre competing against big companies
and franchise operators, the fact that they must pay their workers locally
competitive wages typically means they cant operate much more cheaply
than you can. When it comes to providing essential services, corporate
America cant use the same build it big, sell it cheap formula it so
successfully employed to dominate the shopping mall.
To illustrate, consider that even in the service niches where large
corporations are significant players, including tax preparation (H&R Block),
unplugging drains (RotoRooter), rug cleaning (The Rug Doctor), and mail
service (Mail Boxes Etc.), none of them has been able to eliminate the
tens of thousands of independently operated small businesses that also
populate these fields. To check this out, simply open your Yellow Pages
and count the number of independent tax preparers, plumbers, and rug
cleaners listed right next to the nationally advertised franchise outfits.
Youll not only find plenty, but if you are able to talk to a few, youll
learn that on balance the big outfits do not try to undercut the prices of
the independents.
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Local service providerswhether or not they are affiliated with national

franchises all have roughly similar labor costs, meaning few see anything
to be gained by competing primarily on price. This helps explain why if
you check the prices of several local dentists, chiropractors, or electricians,
most are likely to quote roughly similar rates. With no need to engage in
illegal price-fixing to maintain solid margins, these businesses have all
learned that everyone does better if no one engages in predatory pricing.
True, in some service fields, consumers who comparison shop can find
someone who will charge a little less. But the cheaper players tend to be
tiny outfits that typically offer limited or spotty customer service, underscoring the rule that most top-drawer service providers charge roughly the
same fees.
When national service operations do try to compete on price, results
are at best mixed. For example, in the legal field, both Jacoby & Myers
and Hyatt Legal Services failed to make a profit running lower-cost, clinicstyle law practices, even though the local lawyers they competed against
often charged upwards of $200 per hour. One reason why these namebrand legal operations failed in their efforts to run full-service law offices
was that, as in other fields, it proved hard to hire and retain workers (in
this case, lawyers) at affordable salaries. After all, these people could opt
to work for other law firms that paid better or even open a competing
business across the street.
SuperCuts, a low-cost hair cutter, offers a more successful example of
a price-competitive national service business. But because SuperCuts must
pay its hairstylists decently or risk losing them, any price advantage it
enjoys vis--vis nonfranchise independents is very small. In fact, every
SuperCuts shop Ive checked is surrounded by other independent haircutters, many of whom loudly trumpet that they charge a dollar or two
less. And, of course, SuperCuts has had virtually no impact on the large
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number of more expensive hair salons, whose customers seem happy to

pay a premium for a little extra pampering.
Retail and Other Nonservice Businesses

That Work
A few types of retail businesses have been able to buck the long-term
negative trends that have made it difficult for independent operators to
prosper in most nonservice fields. Most of them are businesses whose
products are handmade or one-of-a-kind, or which occupy niches so
small or specialized as to be beneath the notice of the big operators. True,
some stores that sell high-priced goods to upper-income consumers can
also do well, especially when economic times are rosy, but for the most
part these are not businesses that continue to do well in recessionary
times.
Lets look briefly at why these types of businesses are the exception
to my stay-away-from-retail rule.
Publishing
Businesses like Nolo and other small book, newsletter, and software
publishers have a huge advantage over most businesses. Their output is
protected by copyright, meaning that competitors cant directly copy it.
Thus, as long as Nolo invests the time and energy to create and constantly
improve its books and software, competitors must continually play catchup. True, since ideas and facts cant be copyrighted (only their expression),
all successful nonfiction publicationsbe they restaurant guides, genealogy
software, or a popular series of investment advice titles are sure to attract
imitators. But as many niche publishers like Nolo have shown, small
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outfits that adopt a strategy of continual improvement can both thrive and
prosper.
Arts and Crafts

Although the starving artist is an enduring part of American mythology, in
fact, many artists, artisans, gallery owners, and others who work in arts
and crafts enterprises make a good living. In part, this is because the very
ubiquity of mass-produced items has to some extent boomeranged,
making significant numbers of consumers search for something different.
With virtually everything at the shopping mall made by a machine, many
people are willing to pay extra for handmade or unusual products.
The result is that in all sorts of fields, including furniture, clothing,
garden sculpture, weaving, and the fine arts, many small arts- and craftsbased businesses are thriving. Often these businesses start when a creative
person finds that his or her works are actually saleable and begins to
dream of turning passion into profit. To judge if an arts- or crafts-based
enterprise might work, many aspiring businesspeople often make a crude
calculation along these lines: If I can create five whatchamacallits a week
and sell each for $250, I can make $65,000 in a year, which is more than
enough to support myself. Sadly, this sort of nave approach to small
business economics has doomed many arts- and crafts-based businesses
to failure. Thats because, of course, by the time materials, sales costs,
transportation, and a dozen other expenses are figured in, $65,000 will
melt down to a starvation wage.
Although Achilles himself had but one vulnerable heel, the owners of
small arts and crafts businesses tend to have two. The first, as just mentioned,
is their lack of entrepreneurial experience and business sense. Second,
even those artists and artisans who master business basics must confront
the fact that its no easy task to both create and market products. This
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helps explain why these functions are often separated, with galleries,
crafts shops, catalog companies, or Internet sites doing the selling. But
whether a creative person does the marketing or hires someone else to do
it, marketing is time-consuming and costly. In fact, recognizing just how
expensive it will be to sell your creations and designing a business model
that will allow for an adequate profit after subtracting marketing costs is
usually the key to designing a successful arts or crafts business.
Example:
John and Elaine create garden artlifelike bugs, birds, lizards, and
other creatures cut out of steel with a blowtorch and designed to
be displayed on poles or wall-mounted. To make their business,
called Critters, work, they carefully divide their time between
production days and selling days, sometimes working together
and sometimes going different ways. Like most artists, John and
Elaine find that creating their sculptures is both a lot easier and
more fun than selling them. But by personally marketing their
sculptures at a number of quality craft and street fairs, they are
nevertheless able to sell lots of product with low out-of-pocket
marketing costs. Unfortunately, operating booths at fairs, craft shows,
and other sales venues, in addition to designing and making
sculptures, requires so many long days that John and Elaine have
too little time left to have a decent life. Clearly, to make their
business a long-term success, they need to find additional sales
channels.
Deciding to avoid galleries and stores because they dont
want to pay chunky commissions or get bogged down in keeping
track of and trying to collect accounts or manage consignment
deals, they focus instead on the Internet. First, they display their
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wares on several sites that aggregate the work of a number of

craftspeople and charge reasonable commissions. Then Elaine
takes a website design course and creates their own basic Critters
website.
Now, she and John give everyone they meet at a fair a small
brochure promoting their site. And because they know many of
these will be tossed, they also point out that their Internet address
is etched unobtrusively on the back of each sculpture. Their hope
is that should someone admire one of their creations, its owner
will remember how to point them to Critters.com. Over the next
year, Critters Internet business grows surprisingly robustly. Even
allowing for the higher than anticipated costs of running a website,
it provides a nice stream of profitable retail sales, enough to allow
John and Elaine to scratch five of the least profitable weekend
fairs and hire someone to go in their place to several others.
Niche Businesses
A successful niche retail business is typically one thats popular enough
to make you a decent living, but not big enough to be flattened by the
price-cutting, profit-eliminating competition from mass retailers. Although
finding just the right niche can be tough, when accomplished successfully,
it is a path that can lead to a profitable and lasting business.
Example:
Tod opened The Lizard House, a shop that sold snakes, reptiles,
and amphibians and the often pricey equipment needed to keep
them healthy. By stocking a far greater variety of cold-blooded
creatures than any of the large pet retailers within at least 500
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miles, and providing a superior level of education about how to

care for reptiles, Tod was able to create a store that drew committed
customers from a huge area. He made a very solid profit.
The Internet, with its worldwide reach, is often an excellent way for
a niche business to reach enough customers to be profitable. So if you sell
unicycles, unusual hats, fencing equipment, or custom-sewn sweatshirts
with embroidered names and pictures of horses and dogs, you will almost
surely want to establish an online site. Although most websites that attempted
to sell goods in direct competition with major retailers have lost gobs of
money, lots of highly specialized online retailers are solidly profitable. For
example, a Missoula, Montana, store that sells a wide variety of animal
bones is almost sure to increase its business by going online to reach the
bone collectors of the world, not just those willing to stop by its shop in
central Montana. Similarly, Nolos self-help law site, which offers more
plain-English legal materials than are available anyplace else, is another
good example of how combining a specialized product with the long
reach of the Internet can succeed. Every day Nolo sells hundreds of selfhelp law products, many of which are too specialized to be stocked in
local bookshops, to people all over the U.S. and, increasingly, in other
countries.
Paradoxically, one of the biggest enemies of long-term online
profitability is too much success. A good niche business, such as one that
sells French cookware or Peruvian sweaters, can easily choke on its own
success if its products become sufficiently mainstream that they attract lots
of price-cutting competitors. Similarly, a unicycle sales site may work as
long as there is no mass market in one-wheeled cycles, but will almost
inevitably face trouble the day K-Mart decides it can sell lots of them at a
low price. It follows that if your niche threatens to grow too big, youll
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want to look for a way to reorient your efforts to a specialized slice of it.
Unicycles built for two, perhaps.
Antiques and Collectibles

Antique shops, used book stores, and high-end used clothing shops are
also retail businesses that can do well. Although eBay and other Internet
auction sites offer ways for collectors to find antiques, rare coins, old
books, and other unique items without going to a physical store, so far
there seems to be plenty of business to go around. (A quick count of the
antique shops in your area should verify this.) In fact, many businesses
that specialize in collectible items very profitably combine a physical
location with the use of online auction sites such as eBay. Frequently, the
idea is to use the physical location primarily as the place where goods are
bought at reasonable prices, and the Internet as the place they are marked
up significantly and offered for sale to a potentially huge audience. For
example, a sports card dealer I know sifts through tens of thousands of
cards hopeful collectors bring in each year. Purchasing less than 5% of
them last year, he resold 1,500 on eBay, usually at a very nice profit.
Many one-of-a-kind businesses do well for the two reasons discussed
at the beginning of this section: Lots of people are attracted to unique or
rare goods, and the big box retailers have not found a way to efficiently
serve, let alone dominate, this market. But the opportunity to succeed and
the ability to actually do it are very different things. For example, despite
bright prospects, a high-end, previously owned clothing business that
doesnt buy the right items at the right price and resell them quickly can
die a quick death.
But when a solid market and a smart buyer come together, profits
usually follow, in large part because the markup on used items is usually
much fatter than for new ones. For example, a used book store that pays
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about 25% of the cover price for certain categories of used books can
resell many of them for 60% of the original list price, providing a markup
of 150%. By contrast, a small, new book store will be lucky to buy inventory at 45% off the cover price and, at least with bestsellers, be forced to
give customers at least a 20% discount, ending up with a dismal profit
margin.
Buying, not selling, is often key.

This point bears emphasis. An antique, collectibles, or used
merchandise store will prosper if it buys enough of the right
items at the right price. Thats why experienced owners usually
concentrate on finding the right merchandise. Once they do,
the sales side of the business often all but takes care of itself.
Luxury Goods
Mass retailers make money by selling lots of products to lots of people.
When it comes to items where a few sizes fit most, such as appliances,
tires, and many types of clothing, they are all but impossible to compete
against. But for clothing, furniture, and a number of other types of goods,
people crave novelty. As discussed, one way to get it is to purchase handmade items. Another, obviously, is to buy luxury goods not available at
the mall.
Flight from the mass market makes it possible for shops selling some
types of upmarket goods to prosper. But even though loads of people will
pay $300 for a sweater, $600 for a pair of shoes, and many thousands for
just the right chair, particularly when economic times are good,
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succeeding long-term in a luxury goods business requires plenty of entrepreneurial savvy. For one thing, youll need an expensive address; people
willing to splash out big bucks for items they dont really need are not
likely to do it at the downscale strip mall out on the old state highway.
Add to this the fact that the wealthy are famously fickle. One year everyone seems to need a $10,000 watch; the next, only a $50 Swatch will do.
And finally, while the very rich are always with us and continue to spend
during tough economic times, the merely well-off often cut back on nonessential purchases at first whiff of a recession.
But despite these negatives, lots of retailers do well selling to the
Jaguar trade. The trick is to pick a product enough people are willing to
pay extra for. Fancy lighting is one good example. Big box stores carry
lots of serviceable lamps and light fixtures. But no matter how many styles
they stock, it barely scratches the surface of whats available from small
lighting manufacturers and custom designers. For example, one specialty
shop I occasionally patronize stocks lamps from 144 manufacturers, only
two of which are carried by the nearby Home Depot. Affluent customers
willing to pay hundreds of dollars for specialty lamps and lights make this
little lighting business solidly profitable. Whats to stop mass retailers from
trying to capture this business? Nothingand by constantly expanding
their lighting sections and keeping prices low, several are formidable
competitors of the smaller store. But as long as many tiny manufacturers
produce small quantities of expensive designer lamps, well-run independents can succeed marketing to upmarket customers who want their
houses to look a little different.
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17
React Quickly to Bad News
When the horse dies, get off.

Kinky Friedman
mall enterprises are incredibly sensitive to both good and bad

fortune. A run of good news can result in quick growth and
outsized profits. Unfortunately, the opposite is also true; when
things go wrongoften for reasons beyond anyones controlprofits can
turn into losses faster than the neighbors nuisance of a cat disappears
when you reach for the garden hose.
Its usually exciting and fun to expand a successful business by hiring
additional employees, buying more equipment, renting space, and doing
all the other things necessary to grow. But there is precious little joy in
downsizing a business that has become overextended or otherwise hits a
rough patchso little, in fact, that many entrepreneurs whose businesses
are caught in stormy seas refuse even to recognize that they are in
trouble. Often the result is that owners of a sinking, but nevertheless savable, business delay necessary cutbacks and changes until their enterprise
is so waterlogged it cant be kept afloat.
Act Quickly on Bad News

Huge, once highly successful companies, such as Kodak, Xerox, or AT&T,
can deteriorate for years or even decades without closing. But small
entrepreneurs rarely have the luxury of being able to ride their declining
businesses slowly into the sunset. In the small business world, if revenues
drop significantly for more than a few months, you must both prune
expenses and address the causes of the decline. If you dont, you risk
quick and brutal failure.
How do you know when its time to cut back? Anyone who runs a
small business will immediately know aboutand may well have anticipatednegative events such as a precipitous sales drop, the loss of a big
contract, or the emergence of a tough new competitor. The real problem
is not spotting a disturbing event or trend, but admitting that it is serious
enough to require quick and decisive action. Thus, the owner of the small
Readers Corner bookstore who learns that Barnes & Noble is planning to
open a megastore on the next corner is all too likely to carry on business
pretty much as usual, even as the walls of the huge new competitor rise.
Similarly, the operator of a motel on the main street of a town bisected by
a good-sized highway may do nothing when it is announced that the
construction of a nearby freeway will shunt tourists several miles away
from its front door.
Whistling in the face of entrepreneurial adversity will rarely work.
Once you seeor better yet, anticipatethat your current business faces
a boulder-strewn path, your most important job is to immediately come
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REACT QUICKLY TO BAD NEWS
up with a workable plan to either clear the boulders, choose another

path, or sensibly deal with the problem in some other way. Depending on
your business and the new problem it suddenly faces, this may involve
moving, introducing a new product or service, developing a better way to
reach customers, cutting expenses, or selling the business. But since
survival depends on quickly reversing business-killing losses, its usually
less important what you do than it is that you act before insolvency turns
the boulders in your path into gravestones.
Fix the Problem, Change Direction, or Quit

What exactly should you do when your enterprise is suddenly surrounded
by hostile forces? Obviously, I cant give you a survival plan for your unique
business, but I can remind you that the owner of a troubled business who
gets beyond the denial stage commonly has three choices: fix the problem,
take the business in a new direction, or close down. Lets look at each.
Fix the Problem

When times are good, its easy to expand too fast or into too many unproven areas. As has happened in countless wars, when a victorious army
advances so quickly it outraces its own supply lines, a rapidly growing
business can easily become a victim of its own euphoria, in effect snatching defeat from the jaws of victory. In an effort to open a second caf,
hire more workers for your carpentry business, or expand your nutritional
supplements website, your business can similarly become financially,
personally, and logistically overextended. And when this occurs, new or
newly invigorated competitors are almost sure to attack your core profit
centers.
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As you might expect, both in war and business, often the best antidote for advancing too far too fast is to quickly pull back and consolidate
your initial success. Executing a strategic retreat isnt the only way to fix a
broken business, but absent a clear culprit, such as an embezzling bookkeeper, incompetent manager, or radically new competitive environment
that puts your whole business plan in question, its usually the first one
youll want to consider.
Youll probably want to focus energy on your profitable core competencies while shucking off other money- and energy-draining activities.
To develop a back-to-basics plan, start by looking at the profit margins in
all parts of your little empire. Often youll find that the areas that made
you successful in the first place are still your cash cows. For example, a
coffee shop that has begun to serve dinner, only to be hit by a businessdampening economic downturn, may find that most of its profits are still
made before 10:30 a.m. and that the new supper business, no matter how
excellent its long-term prospects, is causing unsustainable losses. Fine
cut dinner, take a hard look at whether lunch is also a money loser, and
reemphasize coffee and breakfast. When the operation is profitable again,
and sunnier economic times return, take another look at expanding into
pork chops and pasta.
Opening a second or third location is a particularly tough transition
for many small businesses, especially when the enterprise is simultaneously
hit by a profit-flattening event such as a recession, tough new competitor,
or natural disaster. Leaving aside the issue of whether its usually wise for
a successful small business to open additional locations or find other ways
to create new customers, one thing is sure: If your expanded operation
isnt quickly profitable, close it. If you dont, you are at high risk of transferring precious time and energy from the successful part of your business
to the bit that is failing, almost always a terrible strategy.
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At Nolo, we have several times had to resize our operations in light

of less-than-hoped-for revenues. For example, in the late 1990s, we were
suddenly faced with competition from a number of consumer-oriented
legal websites funded with free-flowing venture capital. Looking at them,
we concluded that we either had to invest far more in Nolos website or
risk becoming an also-ran in this critical new self-help law market. Eager
to answer the online challenge, we hired Web programmers, reassigned
legal editors from our book and software operations to Web development,
bought equipment, and took a number of other expensive steps to
quickly expand and improve Nolo.com. Nolo planning documents of
those years confidently looked forward to a day, not far off, when Nolo
customers would be able to handle most of their legal tasks, including filing court documents online using Nolo.coms interactive legal wizards. Unfortunately, the cost of jump-starting Nolos digital future outstripped our
online revenues to such an extent that for two years running, Nolo operated far in the red.
Clearly, a reassessment was in order. In reaching eagerly for the
future, Nolo was obviously in danger of compromising its core book and
software operations. To fix the problem before it finished us, we decided
to severely downsize our online efforts by laying off programmers and
Web designers, cutting our website budget for such things as new equipment, and renting less space. We slowed down development of many
new interactive features and decided to treat the website primarily as a
vehicle to sell our existing books and software. With expenses cut drastically, Nolo quickly returned to the black.
Fortunately for us, at the same time a number of our online competitors
who had emphasized growth and ignored profits, exhausted their venture
funding and went bust. So, even as Nolo reduced online expenditures,
our Internet market share actually increased. Today, Nolo.com not only
brings in millions of dollars, its solidly profitable and steadily growing.
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Dont blame the economy.

When a local or national recession hits, its easy for struggling
business owners to excuse their inability to make a profit by
blaming their red ink on economic factors beyond their control. Like the right fielder who claims he would have caught
the ball if he hadnt slipped on the over-watered grass, this is
a cop-out. Although, admittedly, it can be tough to make
money in a recession, you need to focus on your businesss
fundamentals and on how you can overcome the adversity
you face. Just as lots of outfielders catch balls despite wet
turf, many nimble small businesses survive even severe
economic downturns.
Go in a New Direction
Closing a poorly performing satellite location, shedding side businesses
and concentrating on your strengths, or fixing another problem such as
poor management wont always put a staggering business solidly back on
its feet. If suddenly no one wants to buy your most important product or
service, or a huge competitor has siphoned off a large chunk of your
business, cutbacks or leadership changes obviously wont help. Unfortunately, its fairly common for yesterdays highly profitable business model
to become todays big bust. For example, if you own Stoveland, a business
that sells wood stoves, in a semirural area where new air pollution
regulations have begun to drastically restrict their use, there may be little
you can do to save your core business. Similarly, if your venture-funded
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Internet e-commerce business suddenly loses its one profitable business

niche, cutting back wont help.
Quickly moving to find a new product or service, or otherwise diversifying your business, is often your best chance to survive if your core
business begins to fail. If you have built a culture of continuous innovation
into your operations, you may know just how to do this. (See Chapter 6,
Innovate Now and Forever.) For example, in the last decade, Amy, a
travel agent who specialized in booking business travel, faced serious
problems as a result of the airlines gradual but relentless move to cut
commissions on domestic air travel. But if Amy had been farsighted
enough to early on spot this trend, as well as the related one of customers
increasingly booking air travel online, and as a result began developing a
sideline planning reasonably priced trips for baby boomer retirees, she
would now be well-positioned to turn the side business into her main
business. Similarly, the owners of a rural bed and breakfast, hit by the
double whammy of too much local competition and an areawide economic
downturn, may be able to reenergize their operation by using a website
to market to urban families looking for an affordable and friendly place to
hold reunions.
If your business loses key markets or otherwise faces a severe drop
in revenue, I suggest a two-step approach to analyze your situation. First,
inventory and list your enterprises core skills or competencies. Then assess
whether or not you can market them in new ways. If you do see new
marketing possibilities, exploring them is probably your best strategy,
because there is far less risk in finding new customers for an existing
business than there is in trying to create an entirely new enterprise. Only
if youre sure theres no way to target and reach new customers should
you consider trying to save your business by fundamentally reinventing it.
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Example:
In 1999, Sandrine, Mavis, and Paul formed SMP & Associates to
design websites for e-commerce companies. For two years, business was so good SMPs headcount ballooned to 60, and it was
about to sign a lease for thousands of square feet of office space
in a pricey area called Web Alley. Then, in 2001, the bottom fell
out of e-commerce and new business dried up. Still, for months
the partners thought they could survive until business picked up
by completing SMPs many existing contracts. But when in early
2002 three of their best remaining customers suddenly declared
bankruptcy and two others simply packed up in the middle of the
night and slunk out of Silicon Gulch without paying their bills, it
looked like SMP was toast.
Thats when Mavis mentioned that River People, a nonprofit
environmental group whose board she chaired, needed help with
its website. With nothing else on the horizon, SMP made River
People a proposal and landed a fair-sized job, albeit at an hourly
rate far lower than they were used to charging profit-making
enterprises. The partners decided that redeploying their skills to
design Internet sites for nonprofits was their best strategy to stay
in business at least until higher-margin commercial business again
became available.
To get started, they made a list of the 100 largest area health,
environmental, and education groups. Next, Sandrine, Mavis and
Paul systemically studied each organizations website. Identifying
a number that obviously needed improvement, they began pitching
SMPs design services. Although more than a few of these potential
customers claimed to have no funds to improve their sites, a
number of others were open to SMPs reasonably priced bids,
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especially when Mavis explained how River People had quickly

raised the needed money through a focused membership appeal.
Over the two years, SMP worked with a number of nonprofits
but was still officially committed to eventually returning to the
profitable world of e-commerce. But, at an owners meeting in
early 2004, a funny thing happened. In the middle of outlining his
planned proposal to a potential client in the child health field,
Paul said, You guysIm having so much fun working with
people who really stand for something, I dont want to do anything else. When Mavis and Sandrine agreed, the owners realized
that they hadnt just temporarily adjusted their business plan in
reaction to a financial emergency, they had fundamentally and
happily changed it.
Example:
Jorge and Guillermo thought they would be tremendously successful opening Los Padres Grill, a mid-priced Mexican restaurant
across from a universitys large complex of married-student housing.
With the exception of a McDonalds, there was no real competition
nearby. Still, no matter how tasty its food, Los Padres Grill never
drew the number of lunch and dinner customers Jorge and
Guillermo needed to prosper. After two years, mostly in the red,
they finally had to either quit or try a different approach.
With the help of a loan from their uncle, they converted their
sit-down restaurant to a takeout place with just a few self-serve
tables. Because customers now lined up at a counter to order
food, there was no need for table service, meaning prices could
be reduced. More students were able to afford the food, and Los
Padres dinner business improved.
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But still, because business was decent only at supper time, it

was obvious Los Padres Grill needed to develop additional markets.
Jorge and Guillermo decided to try to find one in the light industrial area that surrounded the student housing. Taking a few days
to talk to workers at an auto body shop, metal fabricating company, wholesale plumbing supply outfit, and a number of similar
businesses, the partners learned that workers didnt patronize Los
Padres at lunch primarily because they were so busy they didnt
take a formal lunch hour. Instead, they grabbed a sandwich off a
roving lunch truck or brought one in a bag. To improve access to
their food, Jorge and Guillermo decided to create what they called
the Taco Wagon. Converting Guillermos pickup truck with
several warming ovens, coolers, and food display units, the partners
began taking their food to the workers, something that immediately
proved popular and profitable.
With their business finally doing better, Jorge and Guillermo
next decided to use their core skill of making tasty Mexican food
to diversify into catering. Realizing that virtually all small businesses
sometimes entertain or order food for meetings, celebrations, and
other events, and that even the financially challenged students
occasionally have parties, Los Padres created a menu of reasonably
priced catered meals. When flyers were distributed at all businesses
on the Taco Wagons route and to customers in the student housing,
orders quickly began to come in.
Taking an under-performing business in a completely new direction,
instead of finding a way to take advantage of its core skills, is a more
difficult task, especially if the business is already in trouble. So the owners
of Stoveland, the wood stove business mentioned earlier in this chapter,
would have at least a decent chance to develop new endeavors if they
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began a well-planned diversification into septic tanks at the first hint that
air quality rules would be tightened. But, like a hotel guest who, when
awoken by a fire alarm, decides that its a false alarm and rolls over and
goes back to sleep instead of heading for the exit, their chances of survival
decrease if they wait and hope for the best. And even if a desperate, lastminute switch into septic tanks keeps Stoveland out of bankruptcy, it may
still not assure it long-term success. Thats because in their haste to find a
new business that will pay the bills, Stovelands owners may end up
working in a field they dont enjoy and wont stay committed to over the
long term.
Close Down
For a variety of reasons, including new competition, a changing marketplace, bad luck, and, of course, owner mismanagement, many small
businesses dont succeed. Unfortunately, some enterprises fail despite the
fact that their owners work hard and do lots of things right, often because
their imagined market simply never existed. But it isnt just marginal
businesses that are vulnerable to trouble. Even initially successful ones
can sail into heavy weather.
Especially when a small business is hit by very bad news, as was the
case in New York City after 9/11 for many travel-related businesses, there
can often be little recourse, absent a government bailout, but to close
down and move on. Or put another way, if there are no tourists to ride
your excursion bus, no amount of entrepreneurial CPR will resuscitate your
business, at least in the short run. And because your business is losing
both money and hope, no one is likely to want to buy it. In Chapter 12,
Learn to Live With Luck, I discuss several indicators that help you decide
when you would do better to close up and move on, as opposed to holding on and hoping for better days. The most important factors are the
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scope or severity of the bad news and how long it is likely to last. Thus if
a new digital technology makes your signature mechanical product
completely obsolete, there is probably little you can do to recover. Like a
manufacturer of carbon paper for typewriters who cant wait until people
tire of computers, you need to move on. But, as was predictable in New
York after the horrors of September 11, 2001, the business-dampening
effects of many types of catastrophic events are likely to pass relatively
quickly. This explains why many of New Yorks tourist-related businesses
that hung in theresometimes with the help of government financial
assistancethrough a very bad couple of years eventually returned to
profitability.
How to Cut Expenses

If your suddenly troubled business still has a heartbeat and you sensibly
decide to quickly reduce expenses, youll have the time you need to either
outlast the problem, market your goods or services more effectively or
diversify. Moving quickly to cut expenses without killing an already
troubled business is no easy task. Here is an ordered approach that I
think makes sense.
Decide How Much to Cut

Your first step is to decide how much you need to cut. Lay off the Prozac
and start by creating a worst case budget for the rest of your current
fiscal year. List only revenue you are absolutely sure will materialize. If,
because of widespread state government budget cuts, sales of your public
library-centered consulting business have dropped 25% in the last three
months and there is no economic rebound in sight, your budget for the
immediate future should obviously reflect this. It follows that to balance
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your budget youll need to cut expenses at least 25% and probably significantly more, since reduced volume is likely to further savage profits.
Sharpen your knife.

Just as its human nature to delay pruning your business while
continuing to hope for the best, when you finally do reach
for the knife, you may be tempted to cut too little too slowly.
If you do, your business, already weakened by losses, will
continue to droop, making additional and often deeper cuts
necessary soon.
Cut Discretionary Spending

If you planned to paint the building, buy new equipment, or hire additional
employees, dont. Only if a particular expense is crucial to an essential
diversification plan should you go ahead. In virtually every other instance,
it makes sense to put new expenditures on hold. And you should try to
do this even where contractual commitments have already been made. If
you are willing to pay a reasonable buy-out fee, you can legally and
honorably negotiate your way out of most agreements. After all, once
clued in to your financial problems, the other party may be happy to
avoid working with you.
In addition, youll want to examine every part of your operations to
make sure pennies arent being wasted. For example, depending on your
business, a surprising amount can often be cut by reducing perks such as
expense account lunches or nonessential travel expenses. And often by
focusing attention on paring even basic expenditures to the bone, such as
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phone service, copying, janitorial services, and payments to a variety of

independent contractors, you can probably achieve significant additional
savings. Even in areas where cuts are more symbolic than significant,
working hard to chop every possible expense sends a message to everyone associated with your business that you are determined to do what it
takes to survive.
Cut Your Pay and That of Any Managers

The biggest expense for many small businesses is the payroll. If this is
true for your enterprise, cutting other expenditures is unlikely to realize
the savings your troubled business needs. Sooner or laterand the sooner
the betteryoull need to reduce the size of your payroll.
The first place to look should be employee perks. For example, if
you match your employees contributions to a 401(k) plan or have other
generous benefits, consider cutting them back. Although often painful, its
usually better to cut benefits before you reduce pay or lay off people.
The first person to take a pay cut should be you. Even if your
compensation is already modest and cutting it wont save much, trimming
your own salary is sure to get employees attentionand their respectin
ways a dozen dire pronouncements never will. Next, you should sit down
with any well-paid employees to help them confront the need to voluntarily
accept similar reductions. Depending on pay levels and other circumstances,
a cut of 10% to 20% is usually reasonable.
This cut-from-the-top approach usually makes sense for several reasons.
First, if you explain it correctly, youll save money without losing essential
employees. Second, and perhaps more important, it sends a message to
everyone connected to your company that you and other managers take
personal responsibility for coping with tough times.
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Example:
John and Adelle own HillTop, a 60-room country hotel near a ski
resort. Although the hotel does decent business year-round, in
most years the lions share of profits are made from the winter ski
crowd, who cheerfully pay high-season rates and eat and drink
everything in sight. After a decade of hard work during which
they invested most profits back in the business, John and Adelle
were finally able to pay themselves and several key employees,
including the reservations manager and head cook, comfortable
salaries. Then came the year when the snow failed to arrive in
their corner of the woods, and the skiers went elsewhere. It didnt
take many weeks of brown slopes and terrible business before
John and Adelle realized that HillTop was in serious trouble.
Calling a meeting of their five highest-paid employees, they
suggested freezing all nonessential expenditures, such as replacing
older but still serviceable equipment, repainting several hallways
and rooms, as well as cutting nonessential items such as subscriptions to periodicals and memberships in trade organizations. They
even decided to ask several employees to turn in their cell
phones. In addition, they resolved to severely cut the budget for
outside services, transferring work to employees who now had
time on their hands. Next they announced they were cutting their
own pay by 20% and were asking all managers to accept a 15%
reduction. A couple of people grumbled, but all they had to do
was look out the window to understand the problem. Respecting
Johns and Adelles determination to take the biggest hit, they
accepted their lower paychecks.
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Cut Jobs, Not People

Unfortunately, in many small businesses, reducing your pay and that of
top managers wont save all that much, since the business probably hasnt
matured enough to afford to pay generously in the first place. In short,
while salary cutbacks, combined with other reductions in spending, are
usually a big step in the right direction, they probably wont save nearly
enough to balance your new bare-bones budget. For most small enterprises, where people are the biggest expense, it follows that layoffs will
be required. Again, dont act like the hotel guest who assumes its a false
alarm when she hears the fire siren. Delay, and you risk having to face a
business-destroying conflagrationwhich, of course, will throw everyone,
including you, out of work.
Unfortunately, unlike the big business world, where the CEO can
order 10,000 job cuts without ever meeting anyone who has been laid off,
reducing your small workplace entails the excruciating task of firing
people you know well and are on friendly terms with. Its so hard that
some businesspeople watch their business fail rather than wield the axe.
But to survive the economic ups and downs that affect any business, you
absolutely must accept the proposition that your duty to your employees
is limited by economic reality. You agreed to hire employees in an effort
to make a profit, not to pay them in all circumstances forever.
Recognizing that laying off people is always an unhappy proposition,
there are nevertheless some good and bad ways to approach it. First, the
bad. Things are likely to further go further and faster downhill if you base
your cuts on the needs of the people who work for you. No question, its
tough to lay off Jeff, who just made a down payment on a new house, or
cut back Morisettes hours when you know she is already financially
stretched helping support her cancer-stricken mother. But, as I learned the
hard way many years ago, if you spare the people who have the most
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sympathetic personal problems, or have worked for you longest, or are

related to you, youll almost always end up laying off other, better workers.
The result will be a business that is less efficient and competitive, and
therefore more likely to fail.
Far better to base your cutback decisions strictly on the needs of
your business. Look at the task that needs doing, not just the person filling
it. If your brother-in-law is in charge of an activity that is losing money,
his position should be cut. And so should every other position that isnt
truly needed. If it makes good business sense, transfer a beloved employee
whose task is no longer essential to a still-needed job he can perform
well. But if the longtime employee isnt well-qualified to do the work,
dont let sentiment cloud your vision.
In a very small enterprise, it will fall to you to decide which jobs
must go. But if you depend on others to help with management decisions,
its extremely important to solicit their help in deciding who you should
lay off, unless of course you have decided that managerial cuts will be
necessary. Its key to involve others because it is often your managers, not
you, who have the best frontline knowledge of which tasks are essential
and which expendable. And because they are the ones who will be
responsible for accomplishing the essential work with a smaller staff, they
are likely to be highly motivated to hold onto the most talented workers,
while shedding the less efficient.
Example:
Returning to our example of the HillTop hotel, it became clear to
John and Adelle that to survive, it wouldnt be enough to cut
discretionary expenses and managerial pay. To plan deeper cuts,
Adelle, the financial officer, prepared a revised budget that matched
expenditures to their newly drafted worst-case scenario. This
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rebudgeting process revealed that to achieve balance, an additional

$200,000 needed to be cut, pronto.
Some cuts were obvious, such as laying off several maids and
restaurant workers who, given the lack of guests, were already
underemployed. To help plan other staff cuts, John and Adelle
convened an off-site meeting of their top people. Fortunately, when
the managers shared their opinions about how best to reduce
staff, a consensus emerged. For example, Constantine, the head
cook and restaurant manager, suggested that while things remained
slow, the jobs of bartender and restaurant host be combined. He
pointed out that most customers ordered easy-to-serve beer or
wine, and that the person who handled both jobs just needed to
know how to mix a few basic drinks.
Then Phyllis, the reservations manager, suggested that while
business was in the dumps she could handle reservations herself,
without an assistant. She pointed out that occasionally, this change
would mean that customers would get a message machine with
the promise of a prompt call back, but given the low volume of
calls, this didnt seem like a serious problem. Finally, John himself
proposed taking over many maintenance tasks. This would allow
HillTop to eliminate the position of in-house maintenance manager,
one of whose main tasks, removing snow from the parking lot,
obviously did not need doing.
The result of these and several other job restructurings was
that $200,000 in salaries could be cut without significantly reducing
essential guest services or eliminating key employees who would
be immediately needed when business eventually picked up. All
told, ten peopleincluding John and Adelles niece, who worked
as a part-time desk clerklost their jobs, and contracts with several
outside businesses were cancelled.
334
Act Slowly to Reverse Cutbacks

After youve had to make painful cuts in jobs and salaries, you would
only be human if you were tempted to quickly reverse them the minute
business improved. Although eminently understandable, especially when
you are dealing with loyal employees whose personal budgets you know
are already stretched, there are at least two reasons why this approach is
almost always a mistake. First, if significant cutbacks were needed in the
first place, it will almost certainly take time for your business to bounce
back to health, even if the factors that triggered the need to downsize
begin to dissipate. Before you should even think about increasing expenditures, this typically means your business not only needs to return to
profitability, but to dig itself out of its financial hole. In many instances,
youll want to repay borrowed money, catch up on deferred maintenance,
and buy long-needed equipment before you give a thought to restoring
paychecks. For example, if you have borrowed $100,000, deferred the
purchase of $50,000 worth of new equipment, and failed to repaint your
tatty-looking building, youve got lots to spend money on before adding
to your payroll expense.
A second reason why you dont want to restore jobs and raise pay to
precut levels too quickly is to avoid the possibility of a double dip. If
after a couple of months your business again underperforms, it will be
emotionally devastating to you and your staff to have to reimpose the
cuts. To say your credibility as a leader will be shot will surely be an
understatement.
Its also important to recognize that all employee costs are not alike.
Rehiring laid-off workers is often a lower priority than is restoring at least
some of the pay of the employees who have stuck with you during the
hard times and worked extra hard to achieve the recovery. In fact, if you
really did adopt a good process to cut your least important functions and
335
your most inefficient people, it may not make sense to reverse these
decisions, no matter how much business prospects have improved. You
will often be smarter to hire fewer, more efficient workers at the same
time you lift the pay of those who have experienced cutbacks. A highly
motivated employee can be at least several times more efficient than a
weak one, meaning you may even be able to get more done than you did
before the cutbacks, when you had more employees. (See Chapter 9, Hire
and Keep Good People.)
Example:
Finally, in the last week of February, HillTop and the surrounding
mountains experienced a deep snowfall. Even though business
immediately improved, John and Adelle decided to keep a lid on
costs until they could reduce the bank line of credit they had all
but maxed out. So except for rehiring a couple of essential room
cleaners and restaurant staffers, and in the process replacing the
two who had been least diligent, John, Adelle, and the other
HillTop managers continued to fill in behind the front desk and
grab the now happily jingling phones. Adelle, subbing behind the
bar, even learned to make a killer martini (use cold gin and just
one drop of vermouth).
Only when a long and busy spring ski season gave way to an
equally good summer, allowing HillTop to reduce its line of credit
to a comfortable level, did John and Adelle finally restore half of
the salary reductions. A month later, when business stayed good,
they hired back the assistant reservations manager. But the old
bartender, who was not missed, was replaced with a new hire
willing, when necessary, to pinch-hit as a waiter. They also kept a
number of the efficiencies imposed during the downturn, including
336
contracting out maintenance and snow removal instead of paying

a full-time employee. Only when bookings for the fall color
season came in strong was the decision made to restore all salary
cuts to their predrought levels and to rehire the final couple of
needed workers. That next Christmas, with business still strong,
everyone who had survived the tough year received a small bonus
along with a personal note from John and Adelle thanking them
for their loyalty.
337
Index
A
Access. See Customer access
Accidental discoveries, responding
to, 117122
Advertising, 8182, 158166
drawbacks, 158162
effective use of, 163165
writing a good ad, 166
Altruism, 17, 203. See also Purpose
Antiques and collectibles retailers,
314315
ARAG, 155
Arts and crafts businesses, 310312
examples involving, 89, 120,
128129, 311312
Attorneys. See Lawyers
B
Bad luck, coping with, 250251,
252258
Bad news. See Financial setbacks
Benchmarking, 113. See also
Copying competitors
Bonuses and rewards programs,
135, 207209, 227
Boredom. See Entrepreneurial

boredom
Brainstorming, 129134, 138
Business plans, 59
Business style, as competitive
advantage, 9192
Business success, 24
competitiveness and, 8788
innovation and, 105106
luck and, 247
owner commitment and, 3240
owner work schedules and, 2,
235236
reasons for failure, 33, 105106
See also Profitability
C
Capitalization, 7173. See also
Starting on a shoestring
Cash flow forecasts, 59
Cell phones, 81
Choosing a business, 3132
Cleanliness, 168
Closing a business, 256258,
327328
Community service/involvement,
21, 176, 179
Competitiveness, 87103
developing competitive
advantage, 8899
examples, 9699
importance of, 8788
staying ahead of the competition,
99103
Competitors, 271282
copying by, 88, 93, 98, 101, 106,
108
earning respect of, 271274
expressing opinions about,
280282
friendships with, 274276
influence on your reputation,
271272, 279280
service vs. nonservice businesses,
307
as source of business, 276278
staying ahead of, 99103
studying and copying, 113116
working for, 278279
Consultants
office space for, 85
for start-ups, 8284
Contracts
franchise agreements, 291292
getting out of, to cut spending,
329
Copying by competitors, 88, 93, 98,

101, 106, 108
Copying competitors, 113116
Coupons, 179
Crediting people for their work/
ideas, 135, 225227
Creditors
benefits of early payment,
259265
if you must pay late, 267269
Credit rating, early bill payment
and, 264
Customer access, 91, 170171. See
also Locating a business
Customer education, 2125,
169170, 176
Customer feedback/requests
listening to, 135137
recording, 134
responding to, 119, 120121,
171172
sharing with employees, 226
soliciting, 136137, 152153,
171172
Customer recourse, 170
Customers
current, targeting, 152156, 160
generating word of mouth,
167171, 304306
identifying potential customers,
141146, 177178
340
INDEX
novice vs. experienced, 149151

outreach to, 147148, 178179
Customer service, 1921, 91,
128129
Cutting expenses, 328334
reversing cutbacks, 335337
D
Decision making, 222224
Declining businesses. See Financial
setbacks
Decor, expenses for, 80
Delegation, 228, 238246
avoiding work you dont enjoy,
4751
how to delegate, 244246
identifying your talents and
productive times, 240244
power of, 4344, 238239
Deviant business model, as
competitive advantage, 8990
Discrimination concerns, hiring and
employee management, 199
Diversifying, 251252, 323326.
See also Innovation
Downsizing, 317318
E
E-commerce, 73, 110, 312, 313314
Economic downturns, business
during, 322
Educating customers, 2125,

169170, 176
Efficiency, 89, 232
Electronics, expenses for, 8081
Email conferences, to develop
ideas, 134
Employee relations, 215229
avoiding ostentatiousness,
216220
communicating purpose to
employees, 203205
cutbacks and, 330331
fair pay and treatment, 201203
giving credit, 135, 225227
having fun, 209214
inclusive decision making,
222224
keeping good employees,
199214
owner involvement and, 227229
showing appreciation, 207209,
225227
soliciting and recognizing good
ideas, 134, 135, 220222
Employees, 181214
bonuses and rewards programs,
135, 207209, 227
cost of, 63
delegation ability and, 44
during start-up phase, 85
evaluations, 198
341
pay cuts/layoffs, 330337

problem employees, 187191
relatives, 186
training and mentoring, 192194,
205206
wages and pay scales, 85, 192,
201, 202203
See also Delegation; Employee
relations; Hiring
Employment law, 199
Entrepreneurial boredom
as cause of business decline/
failure, 3334, 3740
franchises and, 289290
strategies for avoiding, 4051
Equipment, expenses for, 8081
Excellence, 2529, 89, 167168
Expanding a business, 317, 319320
Expenses
how to cut, 328334
service vs. retail businesses,
300306
tips for controlling, 8086
Experience, as competitive
advantage, 92
F
Fad businesses, 107108
Failure. See Business success;
Financial setbacks
Fairness, employee relations and,

201203
Family members, as employees, 186
Feedback. See Customer feedback/
requests
Fetzer Vineyards, 1718, 19
Finances
avoiding ostentatiousness,
216220
charging less than you quoted,
266267
importance of financial
awareness, 5356
paying bills, 259265, 267269
price competition, 96, 273,
307309
profit forecasts and business
plans, 5659, 62, 64, 6566
starting on a shoestring, 7186,
300303
See also Financial setbacks;
Paying employees; Profitability
Financial setbacks
changing direction in response
to, 322327
coping with bad luck, 250251,
252258
cutting your losses/closing down,
256258, 320, 327328
fixing the cause, 319322
how to cut expenses, 328334
342
INDEX
reacting quickly, 318319

supplier goodwill and, 264265
5/15 reports, 134
Flexible work schedules, 195,
241242
Franchise contracts, 291292
Franchise fees, 287, 292, 294295
Franchises, 283296
drawbacks, 285292
evaluating, 293296
good-value exceptions, 284
Freshness, 168169
Fun, in the workplace, 209214
G
Good luck, perils of, 248252
Guarantees, 170
H
Hiring
checking references, 188191,
196197
common hiring mistakes, 183190
how to hire top people, 191197
interviewing applicants, 198
legal issues, 198
mentoring new employees,
205206
testing applicants, 196
See also Employees
Holiday Inn, 120121

Honda, 2627
Hotels, examples involving,
120121, 331, 333334, 336337
I
Ideas
choosing and implementing,
127128, 138140, 222
developing/soliciting, 127,
129138
of employees, recognizing and
rewarding, 135, 220223
Information
customer education/advice,
2125, 169170, 176
new, responding to, 117126
Innovation, 105140
brainstorming ideas for, 129134
as competitive advantage, 91
copying other businesses ideas,
113116
examples, 112, 115116, 117,
120, 122126, 139140
fad businesses, 107108
implementing new ideas,
127128, 138140, 222
invention, 109112
involving customers and
employees, 134137
in response to setbacks, 250251,
254256, 322327
343
serendipitous, 116126
staying competitive, 99103,
106107
to stimulate owner commitment,
4446
taking time to think, 137138
Interviewing job applicants, 198
Invention, 109112
Inventory
costs of, 68, 303
See also Manufacturing
businesses; Retail businesses
Investments, diversifying, 251
Investors, importance of purpose
buy-in, 25
J
Job applicants. See Hiring
K
Knowledge edges, 89, 91
developing, 9497
staying ahead of the competition,
100103
L
Lawyers
hiring, 84
profit forecast example, 64
See also Professionals
Layoffs, 330, 332334

reversing, 335336
Litigation, Nolos Texas battle, 79,
1116
Litigation history of franchisors,
researching, 295296
Locating a business, 86, 90, 91,
316. See also Physical location
Luck, living with, 247258
bad luck, 250251, 252258
good luck, 248252
Luxury retailers, 315316
M
Macys, 117118
Manufacturing businesses,
profitability and profit forecasting,
61, 6568
Marketing, 157179
advertising, 8182, 158166
arts and crafts, 310312
competitive advantage through,
92
costs of, service vs. nonservice
businesses, 303306
creative examples, 76, 121,
159160, 161162, 170, 176,
179
to current customers, 152156,
160
344
INDEX
by franchisors, 285287, 289

141146, 177178
inadequate marketing statement
examples, 143144
key principles, 145146
new marketing techniques for
core business, 323326
novice vs. experienced
customers, 149151
poor example, 158159
publicity/media exposure, 77,
164165, 172176, 179, 279
reaching potential customers,
147148, 178179
word of mouth, 34, 82, 167171,
233, 263264, 266, 304
Marketing plans, 57
Meaning. See Purpose
Media exposure, 77, 164165,
172175, 179, 279
Mentoring new employees,
205206
Mission. See Purpose
N
Nepotism, 186
New information, responding to,
117126
Niche retail businesses, 312314
publishers, 309310
Nolo, 910, 4749, 5758
ARAG partnership, 155156
commitment to legal reform,
1011, 1213
excellence commitment, 26, 27
hiring and employee relations,
182183, 200, 212, 213
responses to competition and
setbacks, 100103, 252254,
321
Texas legal battle, 79, 1116
website, 103, 121122, 313
Nonprofit sponsorships, 175
O
Odd businesses, competitive
advantage and, 8990
Office space, 85, 301302. See also
Locating a business; Physical
location
One-person businesses, 63, 181
Online commerce, 73, 110, 312,
313314
Outsourcing, 300
Overcapitalization, 7273
Overwork, 232233. See also Work
schedules
Owner commitment
business success and, 3240
345
delegating/avoiding work you

dont enjoy, 4344, 4751, 228,
238246
employee relations and, 227229
innovation and, 4446
making time for the work you
enjoy, 4144, 4749
purpose and, 4647
taking time off, 47
Owner compensation, 203
avoiding ostentatiousness, 216220
cutting, 330331
Owner-employee relations. See
Employee relations
Owners work schedule
avoiding burnout, 232236
business success and, 2, 235236
identifying what you do best,
240241
non-work priorities, 236237
planning a sane work schedule,
238246
P
Paying bills early, 259269
benefits of, 260265
Paying employees, 85, 192, 201,
202203
bonuses and rewards programs,
135, 207209, 227
pay cuts and layoffs, 330337

Paying yourself. See Owner
compensation
Peets, 150
Personal priorities, 236237
Physical location, 85, 213
adding locations, 319, 320
cleanliness, 168
cost of, 8586, 301302
freshness, 168169
See also Locating a business
Press packages, 173174. See also
Publicity
Pricing
charging less than you quoted,
266267
price competition, 96, 273,
307309
306309
Productivity
delegation and, 238239,
244245
work schedules and, 241244
Professional advice, for start-ups,
8284
Professionals
office space for, 85
specialization by, 91, 96
See also Lawyers
346
INDEX
Profitability
delegation and, 238239,
244246
importance of financial
awareness, 5356
retail/manufacturing businesses,
61, 6569, 297300
service businesses, 5961,
297300
time required for, 31
work hours and, 243244
writing a profit forecast or
business plan, 5659
Profit forecasts, 5660, 65
examples, 62, 64, 6566
Promotion. See Marketing
Proprietors. See Owner entries
Publicity, 77, 164165, 172176,
179, 279
Publishing businesses, 309310
examples involving, 5556, 83,
89, 248249
profit forecast example, 6566
See also Nolo
Purpose, 1729
communicating to employees,
203205
education focus, 2125
examples, 20, 2225, 2729
excellence focus, 2529
owner commitment and, 4647
superior service focus, 1921

sustainability focus, 1819
Q
Quality. See Excellence
R
Recommendations. See Referrals
References, checking, 188191,
196197
Referrals
from competitors, 276278
customer referrals/word of
mouth, 34, 82, 167171, 233,
263264, 266, 304
Relatives, as employees, 186
Reputation
competitors respect and,
271272, 279280
early bill payment and, 260264
See also Word of mouth
Restaurants
examples involving, 7379,
9394, 205, 325326
franchises, 287288
Retail businesses
adding a service component to, 69
competitive edge examples,
8991, 9495, 100
customer education example,
2325
347
customer targeting/marketing
examples, 150152, 154155,
158160, 165, 179
failure to innovate, 117118, 119
innovation examples, 120126,
128129
online, 73, 110, 312, 313314
locating, 86, 301
owner commitment/involvement,
examples, 3740, 4951,
234235, 241
potentially profitable types,
309316
profitability, vs. service
businesses, 61, 65, 297300,
301302, 307
profit forecasting, 6568
responding to setbacks, example,
254255
Rewards programs, 135, 207209,
227
Royalty fees, franchises, 287, 292,
294
S
Schedules. See Work schedules
Serendipitous innovation, 116122
example, 122126
Serial entrepreneurs, 35
Service. See Community service;
Customer service
Service businesses
adding a service component to a
retail business, 69
charging less than quoted price,
266267
competitive edge development,
examples, 9192, 9699
developing competitive
advantage, 9599
employee relations, example,
229
failure to innovate, 119
innovation, examples, 112,
115116
innovation in, 109110, 110111
marketing, examples, 170,
171172, 173174, 176, 179
opportunities, 5
owner work schedules, examples,
239240, 243244, 245246
profitability, vs. nonservice
businesses, 5961, 65, 297300,
301302, 307
purpose development examples,
20, 2223, 2729
responding to setbacks,
examples, 255, 256
sample profit forecasts, 62, 64
startups, examples, 301303
staying interested in, example,
4344
348
INDEX
targeting customers, examples,

146147, 148, 153, 154
Southwest Airlines, 210211
Specialization, 91, 9697, 112, 123
Sponsorships, 175, 179
Starting on a shoestring, 7186
dangers of overcapitalization,
7273
examples, 7379, 83
300303
spending money wisely, 7986
Success. See Business success;
Profitability
Suggestions forms/boxes, 136137,
222. See also Ideas
Superior service. See Customer
service; Excellence
Suppliers
benefits of early payment,
259265
Sustainability, 1819
examples, 146147, 148,

150152, 153, 154156
141146, 177178
novice vs. experienced
customers, 149152
Testing job applicants, 196
Texas UPLC, legal battle with Nolo,
79, 1116
Thanking people, 227
Toyota, 2627
Trade associations, 275
Training employees, 192194
mentoring, 205206
U
UFOC (Uniform Franchise Offering
Circular), 293, 294
Unauthorized Practice of Law
Committee of Texas. See Texas
UPLC
Uniform Franchise Offering Circular
(UFOC), 293, 294
Targeting customers, 141156

ad targeting, 163165
current customers, 152156, 160
customer outreach, 147148,
178179
Vacations, 47
W
Website design businesses,
examples, 4344, 324325
349
Websites, 121122, 312, 313

Nolo site, 103, 121122, 313
See also E-commerce
Word of mouth, 34, 82, 167171,
233, 263264, 266, 304
referrals from competitors,
276278
Work schedules
avoiding burnout, 232236
flexible schedules for employees,
195
non-work priorities, 236237
planning a sane schedule,
238246
Worksite. See Physical location
350
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1st edition

Nolos Legal Updater

Nolo Customer Service

SUSAN CARLSON GREENE

DELTA PRINTING SOLUTIONS, INC.

Copyright 2002 and 2004 by Ralph Warner.

1 Build a Meaningful Business

How a Tiny Business Took on the Texas Legal Establishment ............................... 8

2 Choose a Business You Care About

Plan for the Long Haul .................................................................................................. 32

How to Stay Interested in Your Business ................................................................. 40

3 Understand How You Make a Profit

Never Be Vague About Money .................................................................................... 53

Why Small Is Better ...................................................................................................... 71

5 Get and Keep a Competitive Edge

Convincing Customers That Youre Special: An Overview .................................. 88

6 Innovate Now and Forever

Invention ........................................................................................................................ 109

A Case Study in How Good Ideas Surface ............................................................ 122

7 Target Your Customers

Be Specific ...................................................................................................................... 143

8 Market Your Business Creatively

What Advertising Canand CantDo ...............................................................158

Other Downsides of Advertising ............................................................................. 161

9 Hire and Keep Good People

Dont Hire Casually ..................................................................................................... 183

How to Hire Top People ............................................................................................ 191

10 Drive a Modest Car

Drive a Modest Car .................................................................................................... 216

Credit Is CheapSpread It Around ........................................................................ 225

11 Dont Work Overlong Hours

The Importance of a Sane Schedule ........................................................................ 232

12 Learn to Live With Luck

The Perils of Good Luck ............................................................................................ 248

13 Pay Your Bills Early

The Benefits of Paying Bills Early ............................................................................. 260

14 Embrace Your Best Competitors

Why It Makes Sense to Cooperate With Your Competitors ............................ 273

Your Competitors Can Be a Source of Business ................................................. 276

15 Dont Buy a Franchise

Franchises That Are Good Deals ............................................................................. 284

16 Sell Services, Not Goods

You Can Keep Start-Up Costs Low ........................................................................ 300

17 React Quickly to Bad News

Act Quickly on Bad News ......................................................................................... 318

Skate to where the puck is going to be, not where it

unning a profitable, life-enhancing small business cant be as

HOW TO RUN A THRIVING BUSINESS

far more significant to your long-term success than would be acquiring

HOW TO RUN A THRIVING BUSINESS

more than a trunk full of humane livetraps, an answering machine in the

n June 16, 1997, I walked out of my office on Nolos second

HOW TO RUN A THRIVING BUSINESS

How a Tiny Business Took on the Texas

BUILD A MEANINGFUL BUSINESS

HOW TO RUN A THRIVING BUSINESS

BUILD A MEANINGFUL BUSINESS

HOW TO RUN A THRIVING BUSINESS

Had any Texas citizens had been harmed by Nolos products?