I recently spoke with an entrepreneur whose business is falling off due to the pandemic. He’s starting to see about a 25% drop in customers and revenue. We talked about rightsizing to avoid unprofitability.

We categorized each of his expenses as fixed or variable. Most of the latter should decrease effortlessly because he’ll be using products and services less. I encouraged him to try to reduce fixed expenses by proactively contacting the people he’s paying and letting them know his situation. He told me he’s begun doing this and has been able to negotiate some savings—most notably, a 40% reduction in rent for the next few months. It turned out that his landlord appreciated the proactive communication and wants to keep him as a tenant. No doubt it helped that the entrepreneur has paid on time for five years and rent payments aren’t the landlord’s primary income.

My big takeaway from this conversation is that proactive communication is powerful. He didn’t procrastinate until things became dire. He acknowledged what’s happening, came up with helpful ideas, and openly discussed the problem with other people it affects. The upshot was an amicable win–win resolution that will help his business survive the downturn and avoid disasters like bankruptcy and lawsuits.

I encourage anyone navigating rough waters to look reality in the face and communicate honestly with other stakeholders sooner rather than later. What you don’t ask for, you won’t get.

How has proactive communication kept you from running aground?

Today I was chatting with an entrepreneur whose company is in ecommerce; it sells other company’s brands to consumers. He does seven figures in revenue. He’s been affected—not too badly—by the pandemic. He’s concerned and trying to plan for different scenarios.

As I asked more questions about the business, I realized it’s a low-margin business that depends on volume. Product pricing is determined by the brand owner (i.e., it’s the MSRP or MAP), competitors offer the exact same products, there are low barriers to entry, discounting to maintain volume is common, and front-line workers are paid little.

For this kind of business, it’s grow or die. The customer wants to pay less (competitors offer the same product) while costs—shipping, wages, rent, etc.—creep up every year. So, of course, margin percentages gradually go down. Most entrepreneurs compensate by growing revenue.

Let’s look at an example.

• Year 1 – Margins are 10% and the company does $1M in revenue. That’s $100,000 in margin dollars.
• Year 2 – Margins decrease to 9.5% and the company does the same $1M in revenue. That’s only $95,000 in margin dollars.

If the owner wants $100,000 in margin dollars in year 2, he needs to grow revenue 11% to $1.11M in year 2. In other words, he essentially needs to do 11% more work to make the same margin dollars. As the years pass, it begins to get really tough. If margins drop to, say, 5% (that’s an extreme drop), he must do $2M in revenue to make the same $100,000 in gross margin dollars. He’s forced to grow the business or die a slow death because he won’t have enough margin dollars to afford the things he needs to run the company. (Of course, the example is purposely simplistic to make a point. It doesn’t differentiate between gross margin and net margin and it features a massive 50% drop in gross margin percentage.)

This kind of business is in a tough spot when the economy shifts from growth to contraction. I pointed all these things out to this entrepreneur and he agreed. We discussed ways to transition his business to healthier margins (for instance, value-added services, his own branded products) and making the best of this difficult period by renegotiating some of his fixed costs.

Are you an entrepreneur just starting out? Are you building a low-margin business? If so, do you understand the long-term implications of that decision?

I’ve shared my views on the importance of bidirectional relationships and treating investor relationships as partnerships. Today, I write about another relationship truth. For most entrepreneurs—and everyone else, for that matter—there will come a time when a relationship is no longer a good fit. This has happened to me when values—mine and the other person’s—don’t align.

At CCAW, we had done business with a certain vendor since our earliest days. Eventually, we bought more from this vendor than from any other, and we’d become one of their biggest customers (for the products we purchased). As with any relationship, there were ups and downs. I was tech focused and pushed them to upgrade their technology so we could integrate our systems and grow the relationship faster. They thought the old manual way worked just fine. Despite this, we continued working with them. It got to the point that CCAW spent about $1 million with them every year.  

It all seemed to work, until it didn’t. They began to gripe about their other customers to me and show attitude to our service team members. For years, I’d met annually with their executive leadership. After noticing these changes, I began inquiring about their company vision and values. Maximizing revenue and profit was their vision, and they had no clear values. It all started to make sense. As they grew, the lack of a clear vision and values caused them to stray from what made them successful.

Our internal data showed that sales of their products accounted for half our annual gross profit. I’d have to figure out how to replace it before I even thought about switching vendors. I was basically married to them. I decided to unwind and replace the relationship slowly over two or three years.

Within a few months, the working relationship between our service team and their sales team tanked, to the point that a blowup reached my desk one day. I reviewed the situation and knew I had to do something. The vendor was eroding our service team’s morale and taking up too much of our operations leader’s and my time. I decided to pull the plug on the relationship effectively immediately. Remember: half our gross profit! I was making CCAW instantly unprofitable. Needless to say, I was pretty nervous. I was under the gun. It was either replace that lost profit or go out of business.

Then a funny thing happened. Because our team didn’t have to deal with this vendor, it had so much bandwidth and time that we were able to invest in both new and existing vendor relationships. In a month or two, we had regained all the lost profit and then some. My service team was happier, our leaders’ time wasn’t being wasted, and the company was back to growing in a healthy and profitable manner.

Upon reflection, I now realize that I made rookie mistakes:

• Hire slow – I focused on growing the relationship with the vendor as quickly as possible. What I should have done is evaluate them more thoroughly before doing business with them or get to know them better before allowing the relationship to reach material scale. I should have found out what they stood for, and why.
• Fire fast – When you make a hiring mistake, it’s best to correct it quickly. Fire them right away. The longer they’re around, the more serious the damage becomes. I tried to ease the vendor out over time. Instead, I should have ripped the Band-Aid off and endured the short-term pain. I could have saved my team a lot of time, energy, and frustration.

We were lucky that things worked out well. Lesson learned: pay much closer attention to the values of people and organizations I associate with. If the values revealed by their actions don’t align with mine, I politely pass. It’s easier to avoid them than to rip and replace.

How has alignment of values affected you?

I’ve shared my views on the importance of bidirectional relationships, which I believe is one of those good-life principles. But for entrepreneurs, understanding how to approach relationships with investors is imperative.

Don’t view a good investor as a cash machine, but rather as a partner in building your business. Yes, they provide capital and seek a return on it, but they can also add value in a variety of other ways. They can make warm introductions to potential customers or vendors. They can tap their networks to help recruit for key positions. They can help you navigate turbulent times by sharing their experiences and strategizing with your team. A good investor may invest a lot of time as well as money. They aren’t just making an investment in your company—they’re investing in the founder—you—too. Quite reasonably, they are likely to want to get to know you before making an investment. In fact, they like to establish the relationship long before they commit funds.

These ideas may help entrepreneurs approach investor relationships correctly:

• Pitching – Don’t expect to walk away with a check. Their feedback can be many times more valuable, especially if you’re early stage. Pay close attention to it. And ask questions. Two good ones: “Is there anyone you think I should know?” “Can I help you in any way?”
• Updates – Send them a clean, succinct monthly update. This will help keep you top of mind. Have a clear ask.
• Touch base – Periodically reach out to ask them what they’re up to and how they view certain markets. Share some of the things you’re doing that may not make the update. Ask if you can connect them with anyone or help them in any other way.
• Make connections – If you know someone who could benefit from knowing the investor, or vice versa, make the intro. Both will appreciate it.
• Share knowledge – If you learn something that you think an investor could benefit from knowing, pass it on.

Approaching relationships with investors correctly can be a game changer. Start developing them early.

Today, someone asked for my perspective on the future. I gave it to him, adding the caveat that I can’t make sense of a lot of things happening right now because I lack the experience. He also wanted to share his thoughts about a new venture he’s considering.

As we talked, I learned more about this potential business, his evaluation, and his timetable. He’s sought the perspective of other entrepreneurs, researched the space extensively, and seriously thought through how to make it work with his personal situation. I was impressed.

I described how I started CCAW. My analysis wasn’t sophisticated. I had knowledge about a space and relationships in it. I saw a problem I thought I could solve. I tested to see what would happen and started the company when my hypothesis was confirmed.

To be fair to myself, I was only a few years removed from being a broke college student. I didn’t have any real responsibilities. My evaluation could be simple because the risk of ruin wasn’t a big deal. And I believe I did one critical thing right: I trusted my gut. I didn’t overthink and overanalyze. (I actually didn’t analyze much at all.) My gut said it was a good opportunity, so I ran with it. CCAW eventually reached eight figures in revenue (while turning a profit), so it worked out in the end.

At the tail end of our conversation, I asked, “What does your gut tell you?” His reply? “I should wait. There’s too much uncertainty in the business model and the timing doesn’t feel right.” I didn’t tell him this, but I agreed 100%.

The next time you’re trying to make an important decision, before you analyze, before you seek opinions, be honest with yourself. Listen to your gut first.

Has your gut helped you in your decision-making?  

Not long ago, I had a conversation with an advisor. He has way more experience than I do in life and in business. He’s been extremely helpful, sharing his experiences to help me navigate deep waters. I’m very appreciative of his counsel. As we caught up, we discussed what we have planned for the future.

He was excited about the prospects of a new company he’s about to form. Sounds good, right? Sure—until you know that the market he’s going after doesn’t exist. No one knows anything about the space . . . and I do mean anything at all. I asked a few questions because I couldn’t get my head around what he was talking about. Then it dawned on me. On the basis of his experience and product knowledge, he’s predicting the future. He’s skating to where he thinks the puck is going to be.

Think back to 2007. Most of us didn’t imagine that social media, delivery apps, or many other things we use every day would be as dominant in 2020 as they are. What’s funny is that in hindsight, it seems obvious. As a society, we were increasingly becoming more digital, our networks were becoming more dispersed globally, and we were carrying mini computers in our pockets. Entrepreneurs who can recognize changes as they’re occurring, make gutsy predictions, and work to capitalize on the opportunities they envision are a rare breed.

I’m not sure what even the near future will look like, but I’m very confident that it will look different. New habits and routines are being established. Some norms (January’s!) will no longer be viable.

All this rapid change offers rare opportunities to people with vision and moxie. Skate to where you think the puck will be. You might be the only one out there for a while, but if you’re right you could score a life-changing goal.

Unemployment benefits claims figures for last week were released today: over five million claims were filed. In the last four weeks, more than 22 million claims have been filed. This is unprecedented.

Over the last two weeks, I’ve had conversations with six entrepreneurs who have furloughed or laid off staff. Each company’s situation was different, but they had one thing in common: the pandemic had put immense pressure on them and a difficult decision had to be made in order to survive.

Each entrepreneur told me how difficult the decision was and how gut-wrenching their conversations with their employees were. They shared some of their thoughts leading up to those meetings, how they were personally affected, and how they broke the news. All of them explained the company’s situation, explained how they came to their decision, and treated their exiting team members as fairly as reasonably possible (depending on the resources available). In short, they treated them like people.

Entrepreneurs are optimistic and see lots of opportunity in the world. But regardless of how optimistic we are, we can’t capitalize on opportunity by ourselves. It’s a team effort and the team is composed of people (not numbers). Nevertheless, to keep their companies afloat in turbulent times, entrepreneurs must sometimes let people go.

Today, almost all entrepreneurs are being forced to deal with uncertainty and immense challenges. I think it’s important to keep in mind that we’re all people—not statistics or numbers. This mindset won’t change what must be done, but it could affect how it’s done. Treating people fairly and with dignity during tough times helps them. Being let go (or having their hours or pay reduced) will still be painful, but they will be able to maintain their dignity and feel like a human being.

Next time you have to make a tough call, imagine yourself in the other person’s seat before you proceed.

What lessons have you learned while carrying out difficult decisions?

Entrepreneurs are naturally optimistic. We see opportunity where others see obstacles. Our glass is half full. This attitude helps us rally a team, make the impossible possible, and turn opportunities into profits. There’s a downside, though: the sheer number of opportunities we see.

At CCAW, I saw a world full of opportunity and shared my enthusiasms with the team. One minute I was excited about a potential new vendor, the next, a new product category, and the next, onboarding everyone to a new piece of technology. My team was also optimistic, and we were bouncing from thing to thing like pinballs and accomplishing only a fraction of what we were capable of.

Finally, I decided to figure out why. I sat down with one of our team members and asked her opinion about why we weren’t making enough progress. The feedback was blunt. “Jermaine, you introduce too many new things too frequently. We can’t do everything at once and don’t know what the priority is.” When I heard that, I realized that I was the problem. I was stretching limited resources across an ever-changing list of ideas that popped into my head. I wasn’t focused, so the team wasn’t focused.

I changed how I operated, beginning to think more medium-term and long-term. Where do I want CCAW to be in a few years? What do I need to get done this year to hit my multiyear goal? I wrote down that single high-level objective. Then I prioritized quarterly initiatives for the team to focus on and made sure alignment with the annual objective was crystal clear. I documented it all on one page and presented it to the team. We discussed it and I made adjustments based on their feedback.

This change made all the difference. It focused everyone on the same things and made our weekly one-on-one and team meetings more productive (and shorter). Did we still drop balls? Absolutely. Were any of those balls mission critical? Nope. We had learned to focus our limited resources on the things that truly moved us forward. Now, to be clear, this was a top-down approach. It fit us because we were a small bootstrapping team. As teams become larger, working from the bottom up can be better.

My big takeaway from this experience was simple: focus. When we focused our energy on a singular objective, amazing things happened. When I speak with new entrepreneurs, they often seem excited about a million opportunities. I share my experience with them and implore them to figure out what’s most important to their business and then focus on that one thing. It’s a game changer!

How has focusing your efforts helped you excel?

When I started CCAW, there was no team. It was just me. The solo years were rough. It was during the housing crisis, so I did what I had to do to keep things going. Having lived the experience of being a bootstrapping solo founder, I don’t recommend it. Venture capitalists and early-stage investors prefer to invest in founding teams—for good reason. I learned why the hard way.

It’s understood and accepted that start-ups won’t be great at everything. They don’t have the resources or experience yet. But if a start-up is terrible at something critical, it can be the kiss of death. You could be great at making a product or offering a service that solves a pressing need. But if you’re no good at making people aware it exists, you won’t be around long.

In my opinion, the key to early success is a complementary team that makes your company good enough at critical things to survive. We all have our strengths and weaknesses. There are areas where we come up short, and that’s OK. A complementary team—one with diverse talents—balances and mitigates individual weaknesses. Your company is less likely to fail if it doesn’t lack essential expertise.

At CCAW, I spent a lot of time trying to get up to speed in areas where I was weak. I became decent in some of them, but it took a ridiculous amount of time and the end product usually wasn’t spectacular. The result was high stress and slower progress than I envisioned. When I added high-level thinkers a few years later who complemented me, our growth accelerated and we eventually achieved eight-figure revenue and were profitable.

When I speak with solo founders, I always share my experience so they don’t have to learn the hard way like I did. Teamwork is dream work!

How has embracing teams helped you succeed?

Today I met with an entrepreneur who’s preparing to solicit investors. As we walked through his pitch deck, he detailed his advantages over competitors. One of them jumped out at me: lower price.

To be fair, there’s nothing wrong with providing a service or product that adds substantially more value than a competitor’s at a lower price. Companies that can do that are usually employing superior technology. But if your product or service is similar to your competitors’ and you’re differentiating yourself on price, you’re on a slippery slope.

Why? Customer loyalty. If the deciding factor for a customer is low cost, that probably won’t change. If a competitor undercuts your price, you will lose that customer. Bargain hunters don’t tend to be loyal to a brand. OK, you might ask, why not just find a new customer? Well, the number of customers is finite, so you want to keep the ones you have. Then there are customer acquisition costs. Marketing to snag a customer is expensive. The cost is justified when the customer will keep coming back over the long term (Amazon and Walmart are extreme examples) or when a one-time transaction has an extremely high profit margin. But when you spend a lot to acquire a customer who buys only once and your margins are low, you lost money on that relationship.

At CCAW, I learned early the importance of charging a fair price. We redid our pricing strategy in 2011. I was betting that consumers were moving away from a recession mindset and were open to paying full value. As predicted, we lost some customers. However, a foundation of healthier margins allowed us to bootstrap our growth from then on.

Venture capitalists can be reluctant to invest in a company where price is the competitive advantage. I encourage new entrepreneurs to be mindful of what kinds of customers are likely to be loyal.

What lessons have you learned about low prices?