The ride-sharing company Uber had its initial public offering (IPO) in May 2019. Depending on how you calculated their valuation, the Company was worth between $75 and $82 billion. As I write this article on July 21, 2019, their current valuation is still around $74 billion. What made their IPO interesting was that a variety of outlets began asking the question “Will Uber ever be able to make money?”.
To those that don’t follow the market closely (of which there are vastly more of you than do follow the market closely), these might have been eye-opening questions. Uber has been a darling of the media and a company in which most of the public has heard nothing more than that they are market disrupters and turning their industry upside down. Most would have been shocked to learn that throughout their history, Uber has actually lost almost $8 billion. How then, can this company not make any money (or better put, lose billions of dollars)?
For the past few years, Uber and other ride-hailing firms elsewhere have used buckets of venture capital funds to drive down fares and flood the streets of cities with cars, clobbering the earnings of their licensed rivals. However, in the name of “scaling”, Uber has built a fundamentally flawed business model. The company bet that their asset-light business model and strong network effects would yield huge economies of scale. They further believed that product line expansion would provide profitable opportunities to offset losses in the core business. Essentially, Uber thought it just needed more customers to be profitable. However, as they kept growing their revenue, their losses increased.
Looking back, there are several reasons for Uber’s flawed business model. Those reasons include almost no recurring revenue, low barrier of entry for competitors, the rising cost of driver compensation and recruitment costs, low customer loyalty, and a service that just isn’t different enough from competitors. Uber could have overcome this and been profitable. After all, it took a few decades, but eventually, New York cabbies were profitable. However, New York cabbies operated as a small business and as such were profit-motivated. Uber, which had dreams on $100 billion valuation, was concerned only with growing their revenue.
There are several lessons in this story for the small business owner. While most small business operators might observe their revenue is hovering between $100k and $20 million in revenue compared to more than $11 billion for Uber, they can learn from this story.
First off, the vast majority of the media pushes the term “scale” to business owners. Can your business scale? Is your business model built to scale? While both of these can be valid questions for some owners, the majority of owners just want to be profitable. Who cares if their business can scale? In fact, most small business owners I know would rather make $100,000 in profit from a business with $500,000 in sales instead of $5 million.
But small business owners get caught in this same trap. Sadly, most small business owners ask themselves the wrong question. The correct question should be “How can I improve my profitability?”. Instead, most small business owners think that by growing their revenue, it will outpace their costs and hence, they will be more profitable. As a result, the question they ask is “How can I improve my revenue?”.
Here is the issue most small business owners will run into. Most will be able to grow their revenue. However, once they do, they inevitably still don’t have the profit they were looking for. The next dollar of revenue never brings in as much profit as they thought it would. As they were growing their revenue, they needed to hire a new employee, get a new marketing service, or make some additional expense that essentially zapped there would be profit. This cycle continues to repeat because the underlying business model is bloated and flawed (not to be confused with being a bad business).
For these profit frustrated owners, they need a different plan. They need to embark on a journey of looking at their business and determine what drives value for their customers. Once they do that, they can then determine how to structure their business model to satisfy their customers. What is amazing about this “profit project” is how many expenses a business makes that don’t have anything to do with driving value for their customers.
This isn’t a theoretical process. They don’t need a 3-day retreat to determine how their business creates value for your customers. This is a step by step process that owners can go through to determine where they should be allocating their resources. Once they do this, all of a sudden they start finding the cash they didn’t know they have. At first, it’s finding those coins in the couch cushions. But as the owner goes through the process, it starts to turn into finding the lost twenty in your winter jacket.
The funny thing about taking more of the “bottoms up” approach we are advocating is the business naturally starts getting to a place where it will be able to scale (yep, we’re back to that word). This process forces an owner to start taking a look at what they’re spending your money on, getting rid of waste and putting processes in place to make your business more efficient. As they start to drive more and more customer value, their revenues will naturally increase.
This approach is obviously much more intensive then what I have described in these past few paragraphs. There are financial statements that need to be reviewed and meetings that need to be held. But the good news is as a small business owner, it is all in their control. As a small business owner, they can move swiftly. The hard part about growing revenues is that there are so many variables that the small business owner doesn’t control. This profit program centers on items that they can control.
Best of all, this profit program drives what most small business owners care about the most. It helps them take more money home. While many small business owners have dreams of being as big as Uber or getting bought out by Google (and that is great), most small business owners just want to make a good living while realizing the dream of owning their own business. One could argue that those that want to be as big as Uber should also embark on this process, or else end up like Uber.
Krieger Analytics is a unique accounting practice that is looking to provide financial clarity for the business owner so they can accomplish their goals. We aren’t the typical accountant as we want to provide a high, more comprehensive level of service to you. We help you understand your past results and plan more for the future. Unlike most accountants, I am also a small business owner so I understand the issues you are dealing with. If you would like to discuss your business and see if we may be the right solution, contact us now.