You probably already know my story.
In fact, you probably already know that in my 20’s I thought I was a pretty cool and successful businessman and I had it all worked out.
I was neither of those things and it was down to one stupid mistake I continued to make from the moment I set up my business until the day I went personally bankrupt for £103,000.
Back when I was 25, I'd set up my Beer delivery company in Leeds, and we were targeting students and late night drinkers by offering an off-license service, delivered to direct their house, between 10pm and 6am.
Whilst there are several services now that do this, back in 2002, when off-licenses shut at 10pm and the beer aisles were closed in 24 hour supermarkets, I had a pretty good demand for my service.
However, for the first year, I made the rookie mistake of competing on price.
My first order was for a delivery of 1 pack of cigarettes.
I didn’t charge delivery, and I marked the cigs up by 10%, meaning I made about 25p on my first order! (Yup, fags were pretty cheap back then!)
For the first 10 weeks, I grew and grew until I was turning over £6,000 a week. I knew I should have been ecstatic, but I was still haemorrhaging money.
Looking back, I can instantly see my mistake: I saw my competition as the local off licenses and the supermarkets, so I set my prices based on their offering.
Of course, this was stupid.
My buying power was embarrassingly small. I had to cover all kinds of other costs that off-licenses didn’t, like phone staff, delivery staff and even website costs.
I’d made the most common mistake that businesses make in business – I’d set my prices too low.
In week 10 I literally doubled my prices and added a variable delivery charge, depending on distance (starting at £3) that paid my driver’s time.
My turnover halved overnight.
However, I realised that I was actually making some money (not for long though, but that's another story for another day…).
[thrive_text_block color=”note” headline=””]The lesson I learnt was that there are lots of customers out there, but not all of them are your customers. [/thrive_text_block]
I should have stayed small from the beginning, and been the ‘luxury’ product, rather than the commodity, with ‘luxury’ prices (i.e. twice the price).
For example, what if I had:
- Upgraded each customer to free delivery on the second time they ordered
- Sent an auto-text to them the next day thanking them for their business and offering them a free bottle of something if they ordered Mon-thurs the following week
- Sent them vouchers for free stuff if they had spent over £40 that week
- Had a loyalty scheme that rewarded them with cool merch like t-shirts
All of these things would have allowed me to charge a good price and make a decent (40% profit) on something they could all have got for half that price in the supermarket.
The key lesson I learnt was this: set your prices based on the value to the customer, not the cost to your business.