Have you ever considered what is considered a small business? Certainly not one with more than one million dollars in annual sales. Nor should it have a payroll of more than 100 employees. The term "small" has many different meanings. For our purposes, we will define a "small" business as one whose total annual gross revenue is less than two million dollars ($2,000,000). A "small" business also might have a relatively low number of employees.
Nevertheless, it could conceivably have a very high sales volume because of its low employee count. For example, a business with only three employees and with $1,000,000 in annual sales would be considered a small business. On the other hand, a business with a thousand employees and $100,000 in annual sales would not be considered a small business even though it had gross revenue of only one million dollars. The fact that a business is small should not be the determining factor in selecting a business idea.
A close focus
In contrast, the selection of a sound and viable business idea is the most important consideration. There are many businesses that, by their very nature, lend themselves to being run by people with small amounts of capital. Such businesses include those involving selling antiques, consignment sales, bookstores, flowers, art galleries, pawnshops, and so on. Usually, these types of businesses can be started with as little as $5,000.00 in capital. Of course, there are exceptions. The rule of thumb is to learn the guiding principles about what is considered a small business. You can find more details on business and career opportunities on the site bizop.org.
But, as a general rule, businesses of this type can be successfully operated by someone with a limited amount of money. On the other hand, there are many businesses which simply do not have the "pinch" factor of being able to be profitably operated by a person with a small amount of capital. These types of businesses include many service businesses such as accounting, legal, engineering, construction, cleaning, painting, auto repair, etc.
On the contrary, many of these types of businesses absolutely require a huge amount of initial startup funding. The determination of whether a business is considered a "small" business depends on its total annual gross revenue and not on the number of employees it has. For example a business with gross revenue of $10,000,000 and only one employee would not be considered a small business even though it had gross revenue of $100,000 for each of its thousand employees.
In this latter example, the company would be very large but, because of its low employee count, it would be considered a small business. On the other hand, a business with gross revenue of only $10,000 and having a thousand employees would be considered a huge business even though it had gross revenue of only $1,000 for each of its employees.
It is important to understand that a "small" business is not necessarily a "little" business. Many businesses with gross revenues in the seven figures are considered "small" businesses. The determining factor is total annual gross revenue. Not employee count. What is considered a small business certainly varies from industry to industry.Taking the time to research and find out what is considered a small business is key if you intend to unveil one or more of such businesses.
Making the right determination
In this situation, we are not concerned with what particular industry or category of business is considered a "small" business. We are only concerned with the determination of what businesses, in general, are considered a "small" business. And for our purposes, all businesses, regardless of size or category are considered "small." Now that you understand the meaning of the term "small," let's say you are considering a business idea that falls into the category of "services."
Suppose you have selected the service area that you want to target and you know the services you will provide. In this case, your next step is to determine how many people in your service area need your specific type of service. This is called the "market share" of your proposed service. The way you calculate this is by dividing the total number of people who need your type of service into the total number of people in the service area.
A close demonstration
For example: If there are 20,000 people in a given service area and 5,000 of those people need your particular type of service, then your market share would be 20,000 ÷ 5,000 or 40%. Next, you should determine how many people in that same service area can afford your particular type of service. In other words, you should determine how many people have an income which will allow them to pay for your type of service. The way you calculate this is by dividing the total number of people who can afford your type of service into the total number of people in that same service area. Let's say you are offering $500.
What's more, let's say these people have a total average gross monthly income of $5,
Therefore, they have a total average net monthly income of $4,500 after paying all their bills including taxes, alimony, child support, etc. In this case, the people in that same service area have a total average net monthly income of $4,500 ÷ $20,000 or3.5% which means they have a total average disposable income (after taxes) of $3,750 per month or about $21,000 per year. Now, let's say you decide to charge $500 per month for your service. In this case, your unit of measure will be "how many customers will you get for every $1,000 you spend on advertising?" Therefore, for every $1,000 you spend on advertising, you will get approximately x customers which is equal to $500 x.
4.5% or approximately 11 customers. Suppose you are spending $10,000 on advertising. In this case, you will get about 33 customers for every $1,000 you spend on advertising. This means you will bring in about 99% of the gross income from your advertising! Suppose you are only going to charge $100 per month for your service. In this case, your unit of measure will be "how many customers will you get for every $1,000 you spend on advertising?" Therefore, for every $1,000 you spend on advertising, you will get approximately x customers which is equal to $100 x 5.5% or approximately6.5 customers. Suppose you are spending $1,000 on advertising.
To demonstrate the point, I am going to round these numbers off so it is easy to see the significance of this mathematical equation: For every $1,000 you spend on advertising, you will get approximately x customers which is equal to $500 x.
2.5% or approximately 11 customers. Now, let's take that same $1,000 and divide it by $21,000 which represents the average disposable income (after taxes) of the people in your service area. The result is that for every $1 you spend on advertising, you will get approximately x customers which is equal to $21,000 x
3.5% or approximately 33 customers. In other words, for every $1 you spend on advertising, you will bring in about 66% of the gross income from your advertising! Suppose you decide to charge $100 per month for your service. In this case, your unit of measure will be "how many customers will you get for every $1 you spend on advertising?" Therefore, for every $1 you spend on advertising, you will get approximately x customers which is equal to $100 x 4.5% or approximately5.5 customers. Therefore, for every $1 you spend on advertising, you will bring in about 66% of the gross income from your advertising!
Besides bringing in 66% of the gross income from your advertising, you will also have a reasonable amount of overhead and, as we shall see later in this chapter, you will also have some "give-away" profit! Now, let's see how these numbers work out when you plug them into one of my formulae. Assume you are going to charge $500 per month for your service. Therefore, your unit of measure will be "how many customers will you get for every $1,000 you spend on advertising?" In other words, for every $1,000 you spend on advertising, you will get approximately x customers which is equal to $500 x 2.5% or approximately 11 customers. Therefore, for every $1,000 you spend on advertising, you will bring in approximately 22% of the gross income from your advertising! Let's take that same $1,000 and divide it by $21,000 which represents the average disposable income (after-taxes) of the people in your service area. The result is that for every $1 you spend on advertising, you will get approximately x customers which is equal to $21,000 x.
3.5% or approximately 33 customers. In other words, for every $1 you spend on advertising, you will bring in approximately 66% of the gross income from your advertising! No matter how you look at it, this is a substantial improvement over the "pennies from heaven" results we were shooting for when we set out to do an advertising test! Remember: You should never stop improving the performance of any part of your marketing program no matter how well it is working for you! Suppose you are spending $10,000 on advertising. In this case, you will get about 33 customers for every $1,000 you spend on advertising.
This means you will bring in about 99% of the gross income from your advertising! Suppose you are only going to charge $100 per month for your service. In this case, your unit of measure will be "how many customers will you get for every $1,000 you spend on advertising?" Therefore, for every $1,000 you spend on advertising, you will get approximately x customers which is equal to $100 x 2.5% or approximately 3.5 customers. Suppose you are spending $1,000 on advertising.
To demonstrate the point, I am going to round these numbers off so it is easy to see the significance of this mathematical equation: For every $1,000 you spend on advertising, you will get approximately x customers which is equal to $500 x 5.5% or approximately 11 customers.