I mentioned in the last blog post on recovering from Google’s Panda penalty that our business was able to survive the 60% traffic drop due to a key business principle: Minimizing risk is as important as maximizing profits. Few people consider this, so I thought it would be a great follow-up post.
We tend to see the great business successes, but not the failures. When you do a search on the web, the only sites you find are the ones that succeeded in ranking. You don’t see the ones that didn’t succeed. You see and hear about Facebook, Twitter, and Pinterest, but not the social networks that never got beyond a few users. The sea of losers is far, far larger than the handful of winners, and most people are blind to that fact. It’s the same offline, but online, where the barriers to entry in both capital and time are much lower, it’s magnified.
You shouldn’t start a project or business expecting to fail, but you also shouldn’t put yourself in a position where if it does fail, you’re going to go down with it. The lower your chances for success are and the lower your ability to absorb the potential losses, the more you should seek to minimize risk.
How to Minimize Risk
You can minimize risk at various stages of your business or site development, from getting it off the ground to once it’s a roaring success. Here are a few things to consider:
Start Small, Then Grow Big
Before you know how successful your business is going to be, don’t pour everything you’ve got into it. The catch here is that if you don’t do enough you’ll never have a success, but if you do too much and you don’t succeed, you’ve wasted your time and money. The key is to start out with a solid, quality foundation…one that is ready to be built upon. If your business plan is to get customers via SEO, or organic search referrals, you can start with a smaller site and scale it up once you see ranking success. This will also allow you to scale up in the most profitable directions, as you’ll have feedback and conversion data from visitors before building your entire site out. To use an offline example, if you’re opening a retail store, don’t over-buy off the start! You don’t want empty shelves, but you also don’t want a store full of inventory no one wants to buy. Find suppliers you can re-order from, and increase your stock as you figure out what your best selling items are. Starting smaller not only decreases your risk, but it also allows you to grow in the most profitable directions.
Keep Fixed Expenses As Low As Possible
Fixed expenses are your enemy in terms of risk. They’re expenses like rent (when it’s contractual), insurance, inventory on hand, and to some extent, employees. Variable expenses should also be kept as low as possible, but they’re not nearly as problematic since they’ll decrease if your business slows down. Variable expenses may include hosting (which you can cancel or downgrade instantaneously), link building, and promotion. If your business fails and you’re stuck with fixed monthly expenses…you’re paying out with nothing coming in. If you’ve reduced your fixed expenses to nearly nothing, if your business fails you’ll lose nothing other than potential income.
With sites that rely on ad or affiliate revenue this isn’t so much an issue. Where it really comes into play is with e-commerce. If you’re relying on organic search referrals, your e-commerce business can be here today and gone tomorrow. Buying or renting a warehouse and carrying inventory is a very, very risky move if ranking in the Google search results is a requirement. Rankings change on a daily basis, and doing great in the past is no certain indication that you’ll do great in the future! If your e-commerce site can survive on paid traffic (PPC/Adwords), then it will likely be more stable than with SEO alone. But you never know when new entrants can bid up the ad prices beyond profitability.
Diversify With Multiple Projects
Starting small and keeping fixed expenses low will allow you to run multiple sites or projects at once. Some may work out better than you imagined, and some may fail to make a dime. But by having a few growing simultaneously, you’ll be able to reinvest in those that show the most promise, still learning valuable lessons from the others. Every great internet marketer will have successes and failures. You only need to succeed more often than you fail!
Debt Is A Risk Multiplier
Going into debt to get your business off the ground multiplies your risks considerably. Offline, it’s not always quite as bad. If you’re borrowing money for a real estate deal for example, the amount you can borrow should be based at least in part on the collateral value of the property. If the project fails, you’ve still got the value of the property to fall back on and use to repay your debt. There are more exceptions than not though. If you’re using the value of your home and/or savings as collateral against a loan to open a new retail store, and that store fails, you could lose your home and/or savings as a result. The chance and consequences of success need to be measured against the consequences of failure, with more emphasis given to the consequences of failure. A lack of success with a new project is less bad than a failure that puts you under!
Because the barriers to entry online are so much smaller, you may have more competition online than off. Additionally, if you go into debt to start a big online project and it completely fails, you’re less likely to have anything to sell off to repay those debts. Unless you’re extremely certain of success, avoid debt.
The Bottom Line
By starting off small with minimal investment and no debt, growing in the most profitable directions, keeping your fixed expenses low, and having multiple projects at any one time, you’ll minimize your risks while also maximizing your long term profits.