We recently looked at buying a great but highly seasonal business and decided to pass.
Here’s why, and what you can learn from it:
First a bit of backstory…
In college I started a student note sharing and content business.
We made 90% of our revenue in 3 months of the year.
What would otherwise be a nice business was complicated by seasonality.
Why?
Limited Experimentation. Let’s say your business is selling T-shirts. People buy your T-shirts year round. You can test a new pattern or a new marketing strategy every week, and you’ll immediately learn what works and doesn’t.
Those learnings are compounding, making you a better business person.
When you’re catering to the college study market, you have 2 main bursts of activity.
Fall and Spring semester.
So instead of testing new ideas weekly, you have two opportunities to learn if you made good or bad decisions each year.
The math is simple.
College Business: 2 learning cycles per year
T-Shirt Business: 52 learning cycles per year
The T-shirt business owner is learning 26x more than the College Business owner in the same year.
Please note I’m not suggesting you go into the t-shirt sales business. I’m using it to illustrate a point on compound learning.
Poor Cashflow Cycles. When you get paid twice a year, you still have costs for the businesses throughout the year (salaries, insurance, marketing spend…etc).
Those costs come out of your cash reserves. Your working capital needs are high.
Also, if you want to grow, you’ll need to hire employees and increase marketing spend.
So not only are you taking on a meaningful cost upfront.
But you’re also taking a risk.
What if your growth efforts don’t work?
You spent all this money assuming your unit economics were good, but many months later during your revenue season you learned that your hypothesis was incorrect. Ouch.
I experienced this with my note-taking business. Here’s the story:
We used to spend ~$100,000-200,000 per month advertising on Facebook to attract college students to become class notetakers. Our cost per lead was $1.50. We knew that ~5% of leads turned into notetakers who generated revenue for us with an average of $150/student per semester. The gross margin was 50%, not bad, but also not great for a “tech” business.
As we expanded to new schools our cost per lead went up (which was ok, we had a lot of room to play with especially if notetakers stayed around multiple semesters).
So we raised some money and spent 5 months marketing to grow the business at the new $4/lead.
Then when school started again in the fall, we learned that notetakers at these new colleges were generating 50% less revenue! Ouch. Our unit economics were upside down now, and a lot of that marketing spend was gone.
If our business was not seasonal we would have discovered this drop in revenue much faster, and adjusted our marketing spend…but alas, we were newbies.
This is a painful lesson I learned early on. My first business sold course delivery software to universities.
I don’t recommend this as a business model, I’ll tell you why in a future post.
But I’m grateful I started this business. I taught me a lot about sales.
One of the key lessons I learned was to ask the following questions:
“who makes buying decisions for this type of product?
“who else needs to be involved?”
“is that everyone?”
“how do you make these decisions and at what point in the year?”
“Is there a budget? Who decides how big the budget is, and when is that decision made? By who?”
“what is the last software you bought that is similar to this? how much did you pay? who was involved in the decision?
“who may block the purchase of this product? anyone else?”
Your job as a sales person is to identify the needs of your buyer and connect those to your solution.
But more importantly, you need to understand how the buyer makes a buying decision.
I’m going to tell you a short personal story to illustrate my point…
First, imagine me as a college student.
I had this nifty software we built. And I was ready to sell it. So I would travel from college to college meeting with Deans and other senior people.
Here is a common scene I experienced:
I pitch the Dean of the college on my software…
They would tell me: “I love this, students will love this, we should definitely sign up!”
And we would spend the next few meetings talking about price, the offering…etc.
I assumed that person was going to buy my software…
After a few meetings, I didn’t feel like we were making any progress.
So I’d ask: “what’s the next step?”
And they would say “oh, I have to check our budget” or “I have to talk to our CIO”.
And that is when I would realize that this person I had spent months selling to had no buying power…
Why does this happen?
1) people like to feel like they have power. So they may suggest to you they have more control in their company than they do.
2) people will fall in love with you, and your entrepreneurial energy. They think they’re being supportive and helpful by telling you your idea is great, and getting excited about buying it (it comes from a good place)
Of course this is a huge waste of time for you as an entrepreneur.
So don’t beat around the bush.
Use the first meeting with anyone you meeting to ask the questions above. You’ll need to ask a few people to really get to the bottom of it.
Goodluck!
Have a great week,
Sieva
ps: call someone you love today
‍
