A client recently gave us the book Delivering Happiness: A path to profits, passion and purpose by Tony Hsieh, CEO of Zappos.com. It’s a great book and one story particularly stood out to us. Hsieh talked about how he developed his poker-playing skills through study and practice.
He went on to illustrate similarities between poker and business, and one of those had to do with table selection. He pointed out that when playing poker in a casino, choosing the “right” table of opponents greatly increases your chances of winning. “I learned that the most important decision I could make was which table to sit at,” Hsieh said. He believes this principle also applies to business.
We liked Hsieh’s idea but wanted to delve deeper into this concept, so we started thinking about what the right table means for business owners and how it can help increase their likelihood of success. Here are our ideas for the best business “tables”:
The table with a good gross profit margin. People have often come to our firm asking advice about a “great” business opportunity. But digging a little deeper has sometimes shown these opportunities were not so great because their gross profit margins were too low. A lot of people don’t understand this principle so please indulge us as we have a quick lesson in business finance.
Let’s say your company’s gross revenues for the year are $100,000. If it costs you $30,000 to pay for whatever it takes to create your product or pay wholesale for whatever you sell (your Cost of Goods Sold), you’ll have a gross profit of $70,000 — or a gross profit margin of 70 percent. That’s money you’ll have left over for overhead expenses, such as rent, utilities, non-production salaries, and net profit. But if your COGS is $70,000, that will only leave you $30,000, or a 30 percent gross profit margin, to cover all of your overhead expenses and net profit.
The table with the 70 percent gross profit margin is obviously a far better risk than the one with a 30 percent margin, which is an important consideration when starting or buying a business. If you already own a business, look for ways to increase your gross profit margin to improve your table position.
The table with limited competition. Hsieh mentions not wanting to sit at a table with too many competitors but we’d like to elaborate on that. Obviously, the fewer competitors you have the better the market will be and the easier it will be for you to make money. Opening a coffee shop in an area where Starbucks has three stores within a one-mile radius is probably not a good idea. So conduct some market research to learn as much as you can about your competition before sitting at a table where too many people might be playing the same game you want to play.
The table where you’ll have enough money to play. Some businesses and industries require a lot of capital. Examples are companies requiring heavy, expensive equipment, such as excavators or manufacturers; ongoing research and development; technology that constantly changes; or ongoing development of new products. You may need a backer (banker, equity partner or investor) if you want to stay in the game. Without enough money, you’ll always be strapped for cash and your competitors will outspend you at the table.
The table in a growing industry. Some industries are stagnant or losing ground. We’ve all seen examples of this in the video rental industry, where stores have closed because more people are downloading movies from the Internet, or getting them from Netflix or Red Box. If you’re considering starting or buying a business, first conduct thorough research to make sure the industry is growing and healthy. If you already own a business in an industry that’s either not growing or is declining, start looking at ways to improve your table position by changing or increasing your product line or service offering.
As with everything in a successful business, sitting at the best “table” requires knowledge and strategy. When considering new business opportunities or improving your existing business, look beneath the table’s surface to see what’s under the veneer. Becoming a wiser and more informed player will help ensure you’re at a table where you can be a winner.
Laddie and Judy Blaskowski are partners in several businesses, including BusinessTruths Consulting. They are authors of The Step Dynamic: A Powerful Strategy for Successfully Growing Your Business. Judy@BusinessTruths.com.