As an avid reader of Harvard Business Review, the cover article of the March issue caught my attention: The 3 Rules for Success.
In case you are not familiar, HBR is widely considered the expert authority on all things business and entrepreneurship. While the magazine focuses more on enterprise business than it does on startup culture, the business principles discussed and shared are still often universal and able to be applied to both Proctor and Gamble and a small startup business with a team of four.
In this recent HBR article, authors Michael Raynor and Muntaz Ahmed analyzed over 25,000 companies over a 44 year period to find what matters when it comes down to building a successful company. At the end of their journey, Raynor and Ahmed argue that making a successful company can be boiled down to 3 essential elements:
- Better before cheaper. Don’t compete on price at the outset. Compete on differentiators.
- Revenue before cost. Don’t focus on cutting expenses. Focus on generating revenue.
- Nothing else matters. Do whatever necessary to figure out 1 and 2.
Now, while it is always challenging to take something as complicated as the business success and indeed distill the cause down to a list as small as 3 points, this article still demands attention and should be considered by all entrepreneurs—both seasoned ones and those new to the game.
Better Before Cheaper as One of the Rules for Success
As a startup entrepreneur, it can be very tempting to lower the price of one’s product or service down to the lowest price point possible. It’s common as a new business owner to be afraid that no one will buy your product. The temptation is to simply lower price so low that the market has to buy, but this can be hugely counterproductive. Instead, it is much smarter to place the price point higher and compete on differentiators rather than price.
The race to the bottom will typically be won by the largest companies that have the most efficient distribution and marketing channels and the deepest pockets to sustain razor-thin margins. New companies usually do not have large distribution and marketing channels or deep pockets. Therefore, it’s best to stay focused on creating a great product and competing on differentiators that set your product apart from the competition.
Revenue Before Cost as One of the Rules for Success
By nature, entrepreneurs are often risk takers. However, there is usually at least one partner who is the number cruncher. The temptation for this person will be to expend significant effort on keeping expenses in line and reducing them whenever possible.
This focus on expenses, however, ought to remain simple and straightforward. Don’t spend money on stupid, unnecessary expenses like a country club membership. Otherwise, however, it is essential to keep all focus on increasing revenue rather than reducing costs. A company will be successful because it has the ability to increase revenue and grow strongly. Not because it can reduce expenses. Again, controlling expenses is essential. But, it should clearly receive much less attention than that paid to increase revenue and to grow the company.
Nothing Else Matters as One of the Rules for Success
Raynor and Ahmed argue that little else matters when building a company. While many will raise considerable objections to this notion, it should go without saying that paying close attention to these two points is essential. Focus on competing on differentiators, not on price. Also, focus on revenue before cost, and let the rest fall where it may.