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5 Business Failures That Nearly Killed Our Business

It’s often easier to blame our failures on situations or circumstances that are beyond your control than it is to objectively look at our role in the failure.  On the sliding scale from horrible to excellent, most of us would rate ourselves at above average or better on most things.  (The things that matter, anyway)

Quick Question: Who reading this thinks they’re a bad driver?  Exactly…but I’ll bet you KNOW a few bad drivers, eh?

Don’t worry, you’re not alone.  I do this too….

But…I’m going to try to get over that for the next few hours so that I can honestly share with you some of our most costly mistakes in business over the last 8 years.  It’s going to be painful…some of the problems here are personal and have affected me deeply…but I figured it’s worth a bit of my discomfort if I can help you to avoid some of these awful, painful, and costly mistakes yourself.

Alright…here we go!

Competing On Price Sucks…

Joe and I had been offering mortgages directly for a few years when we decided to setup our mortgage company with a third partner.  We’d made quite a bit of money selling the loans ourselves, but were aware that the majority of the money made on the completed loans went to the company or the broker that we worked for.  Our plan as a broker was to offer much higher “splits” to guys and gals who processed their loans through us to attract better talent and to make our money at scale.  While most companies or brokers were making 50-60% on each loan that went through, we thought we could make it work at 20-30%.  Instead of having to focus on selling mortgages (Joe and I really wanted out of direct sales) we thought we could instead focus on recruitment and service delivery for our clients.

While we increased the amount of money coming through our business, we realized that our margins were so small that the profits we were generating were significantly less.  Ultimately, we ended up working harder for less money and were not able to deliver nearly as much value for our Loan Officers as we would have liked.  While we were able to recruit quite a few Loan Officers to work for us we had problems keeping them onboard as we weren’t able to deliver the level of service we would have preferred had we been in their shoes.

Takeaway:

Looking back, we might have been better off giving industry standard splits and over-delivering on service in terms of quality leads, extremely competent loan processors, etc.  Our better margins would have given us the breathing room to do this and turn enough of a profit to make it worth our time.  We may have recruited less Loan Officers to work for us, but I believe many of them would have stayed with us longer, improving our “Lifetime Value” of each Loan Officer we successfully recruited.

“A Rising Tide Lifts All Boats” – But The Reverse Is True As Well

The mortgage business was extremely profitable through 2005/2006 and almost everyone in the business was making a ton of money.  While business was booming, it became apparent that this continued growth was unsustainable.  Joe had gone through the dot-com bubble of 1998-2001 and we regularly discussed the similarities.  (i.e. undeserving business/individuals getting investment, crazy valuations, and loans)

When it crashed, almost everyone was decimated including us.  The many brokers/lenders that were going out of business were documented and reported online and it was a real shake-up for the industry.  While things had gone well in previous years, we quickly found ourselves heading down with the ship.  While our business model was shaky to begin with, we also saw companies that were previously doing extremely well close their doors.  We ended up hanging on WAY too long and it cost us quite a bit…

Takeaway:

There are successful industries even with a down economy, but it’s MUCH harder to build a successful business in a withering industry.  (We’re talking to you print media!)  We would have been much better off reinvesting previous profits into a new niche rather than trying to hang on to the one we were in.  That mistake cost us dearly…

Playing The “Who Can Work Less” Game

This problem might be a bit unique…we’ve discussed it with other people who are in partnerships and they haven’t dealt with this before.  There were three of us in the partnership with our mortgage company: Joe, myself, and a relative of mine.  There was a problem regarding balanced workload early in the business, but this was less of a concern as the business continued to do well.  Once things started going downhill our third partner significantly backed away from the business and was doing very little work at all.

We discussed this at length, trying to encourage him to get back on track but it wasn’t working.  We split the business equally paying ourselves the same amount whether we were meeting our individual obligations or not.  This obviously led to serious conflict and ultimately, led Joe and I down the same path.  Rather than competing to see who could accomplish more and driving each other, it became a game of who could do the least and get paid the same…a horrible downward spiral.  This was never resolved and we continued down this path until we had to shut down the company.

Takeaway:

Unfortunately, I don’t really have a great answer to this problem…it’s something that still pops up and is discussed today.  There are three pieces of advice, though, that I think can help:

1. Partner with someone whose goals are aligned.  More than the end-goal, I’m talking about similar thoughts and feelings on how to get your business from Point A to Point B.  It helps to be brutally honest early on…better to cut through the BS and get to the heart of it early.
2. Have individual responsibilities documented.  This can be difficult as some jobs are more easily defined than others, but have a basic structure in place that defines the minimum amount of work required of the partners.
3. Review both goals and responsibilities at least every six months.  Goals change.  Individual motivations change.  It’s good to check in, make sure you’re on the same page, and review individual responsibilities to make sure everything is working out.

Finish Testing Before Scaling

Joe and I both worked for an internet marketing company that had gone through a recent growth spurt in sales and was still reeling operationally and trying to keep up.  The sales team was looking to capitalize on our growth and proposed a plan to offer new clients a free trial for 30 days.  We decided it would be better to have a legitimate credit card on file, so we agreed to charge them $1.00 for the first 30 days, full price at the end of the first month, and their monthly fee each month thereafter.

We decided to test through 50 of these sales and they all came in the first day.  Everyone was fairly excited and we decided to extend the test to 500 sales…which then turned into our new price point for the next several months.  This led to triple the sales we were getting before and that led to a hiring frenzy.  We added massively to our team which, of course, significantly increased our costs.  The problem?  Less than half of them were paying at the end of 30 days, our lifetime value per (this type of) customer was horribly low, and we were WAY upside down on our customer acquisition cost.  Ultimately, this mistake cost our business more than $1MM in capital, requiring us to again go on the road to raise more money in one of the worst economies we’ve ever seen…ouch!

This problem continues to follow us, it seems.  We’ve failed at this more recently with linkbuilding to our niche sites and testing with IntelliTheme and we’re dealing with those repercussions as I write this…

Takeaway:

When it comes to your core business, make sure to set and STICK to the limits or parameters of your test and be sure to allow enough time to review the success or failure of that test.  This can be particularly difficult (and less applicable?) in a start-up environment as there are often large-scale changes happening on a regular basis, but separating out the tests to core and non-core can keep you on track.

“Middle Of The Road” Sucks In Business (It’s Better To OWN A Smaller Niche)

When we created our outsourcing company, we didn’t really put much thought into the uniqueness of our offer.  We knew there was a need for outsourcing and VA’s in medium sized businesses and figured we could do well in the space.  We created an average, corporate website.  We put up safe blog posts, outsourcing much of the content.  We charged our clients an “industry standard” amount.  Guess what happened?  Not nearly as much as we would have liked…

Sure, we got some leads through the website and we were even able to close enough of them to turn this into a real business.  (Turns out, it IS unique to be an American on the ground running your own outsourcing company in the Philippines…some of our clients really appreciate that.)  Still…I do feel that it had more to do with being in the right place at the right time and the rising tide that really helped build our outsourcing business.

One last point here – We didn’t do a great job of screening clients at first.  We ended up taking on clients that weren’t necessarily a good fit.  Transcription services?  Yep, we can do it!  Calling local businesses in the US?  Of course!  Social Media management?  You betcha!  Of course we could do all of those things…the problem was that we didn’t specialize in any of them.

Takeaway:

It’s much easier to be a purple cow and stand out in a smaller niche.  Embrace that and work your ass off to be #1.  It’s often better to be #1 in one niche than #3 or #4 in several.  It’s ok to turn away clients if it’s not a great fit, but when it IS a good fit, you’ll know it and they’ll feel it…

This list is certainly not exhaustive.  We’ve made many more mistakes than this, but I thought I would share these as they’re so applicable to Internet Marketing.  It’s a little embarrassing…but hopefully sharing this will give you some insight and help you avoid some of the problems we came across and bad decisions we’ve made.

Now…over to you!  We’d love to hear about any of your business failures that you’ve learned from and can share.  Have anything you’re struggling with now?  Let us know in the comments below!