Calculated Risk in a Small Business
July 26, 2016
Risk is always going to be present in any business. This risk, however, is inherently greater for a small business. It is estimated that there are approximately 30 million (plus or minus) small businesses currently operating in the United States. While this might be considered by some to be a staggering statistic, the success rate (or failure rate) is more staggering. Although it cannot be documented with 100% degree of certainty, it is estimated that:
• Only 70% of new businesses will still be operating in two years
• Only 50% of new businesses will still be operating in five years
Even for those businesses still operating after two or five plus years, risk is still present. Competition, the economy, changing times, employee turnover, availability of new products and services, or capital structure all contribute to risk.
When there are so many variables that can affect the outcome and profit of a business, inherent risks must be reduced to a "calculated risk."
Trial and Error
Taking a conservative approach to new or updated products and services through a series of trial and error tests can significantly reduce risk for a small business. Rather than "putting all eggs in one basket," testing the market for acceptance allows a business to judge the possible future effects of what is being offered.
The expression...ripple then splash...is an analogy to trial and error. Test the water of an idea to get customer reactions before investing valuable resources both financial and manpower. Is the ripple what is expected? Smaller or larger? From this type of test, adjustments can then be made to products, services, marketing, personnel, etc.
Trial and error testing can be repeated numerous times over until the "right recipe" is found. When everything is in place, then the time is "right" to make a big move. Throw a pebble, make a ripple. Throw a boulder, make a splash!
There is nothing that can compare to obtaining relevant feedback from prospects and customers. Ask what they want. Seek their input and advice. Owners, managers, and employees have their own ideas, but it's customers who purchase and ultimately pay the bills for a business.
Feedback can be received by simply talking to prospects and customers, sending or emailing questionnaires, or having in-business response cards to more elaborate forms of feedback such as focus groups or secret shoppers. Whatever method of data collection used, the feedback received can aid in lowering a business risk by offering products and services that customers want. Customers purchase benefits and seek solutions to their problems. This might not necessarily be the benefits and solutions that the business thinks they want. The only way to find out is to ask and seek feedback...another risk reducer.
There is nothing like success. Why not imitate it? There are more than enough successful businesses around to imitate. This doesn't mean trying to mirror image a successful business but taking the "best" of many businesses is an excellent method to not only reduce business risk but at the same time plant the seeds for future success in one's own business.
Reinventing the wheel takes time, money, and effort and with it produces risk. Successful businesses have already gone through a process of finding the key ingredients important to success. Use their experiences in your own business to produce positive results. Why use your time, money, and effort when another successful business has already paved the way?
Capitalize on Strengths
While a business might offer a multitude of products or services, some undoubtedly stand out as being superior and profitable. While it is important for a business to improve on its weaknesses, concentrating on the strengths of a business produce faster results, especially when personal efforts and financial resources are limited.
Knowing a product or service well, how to market, and price these products or services while satisfying the needs of customers contributes to risk reduction. Conversely, risk increases as resources are spread too thin.
Small business owners are confronted with daily decisions. It is how these decisions are made and what decisions are made that will contribute to the success or failure of the business. Taking "calculated risks is an important factor when decisions are made.