Street Smarts

by Norm Brodsky

  4. An expanded marketplace. Then, of course, there was the Internet’s almost magical ability to remove geographic barriers. Before the Web site went up, Data-Link’s market was pretty much limited to New York, New Jersey, Pennsylvania, and Connecticut—that is, places within driving distance of the Stones’ home. To get customers, Bobby and Steven had to go see them. After going online, Data-Link could sel to customers as far away as Australia, South Africa, Singapore, and the United Arab Emirates.

  5. A higher percentage of credit card sales. For a smal company, there are no bigger headaches than the ones you get when you’re trying to decide about extending credit to customers, or when you have to send out and col ect hundreds of little bil s. It’s almost always better for customers to pay by credit card, but it’s hard to insist on that when you’re signing them up through cold-cal ing. A customer who seeks you out through the Internet is another story. Before Data-Link went online, about 1 percent of its sales were charged to credit cards. Afterward, the figure was closer to 20 percent. As a result, Helene Stone mailed out 250 fewer bil s in 2000 than she would have had to send in 1997, and she had 250 fewer concerns about col ecting.

  6. A solution to the onetime buyer problem. Although most businesses want a solid base of repeat customers, it’s nice to have some onetime buyers as wel , if only because you don’t have to offer them the discounts you give to your regular customers. The problem is that onetime buyers are notoriously expensive to find and difficult to col ect from. By getting customers through its Web site, Data-Link could find onetime buyers very cheaply, and it could deal with the col ection issue by insisting they pay with a credit card or waiting for the check to clear before shipping the order.

  I could probably come up with other benefits that flowed from Data-Link’s move to Web-based sel ing, but you get the picture. The changes clearly strengthened the company in just about every respect. And, unlike the folks at, say, Amazon.com, the Stones built their online business while maintaining average gross margins of 32 percent.

  Follow the Numbers

  As time went by, the Stones’ business continued to grow, even as they continued to work out of their home. In 2001, Bobby and Helene’s daughter, Jennifer, joined as Data-Link’s third salesperson. The fol owing year, the company’s annual sales topped $2 mil ion for the first time and kept growing. By the middle of the decade, Data-Link was doing more than $3 mil ion in sales every year.

  Meanwhile, Bobby and Helene continued to monitor their numbers closely. Whenever they noticed something of concern, they would give me a cal , and we’d arrange a meeting, usual y fol owed or preceded by dinner. One day they cal ed me about what they perceived as a disturbing trend.

  They told me that, for the previous five months, their monthly sales had been 25 percent to 30 percent lower than normal. Among other things, they’d lost al their “special sales.” Those were nonrepeating, high-volume, low-margin sales—exactly the kind of sales that I wouldn’t let them accept when the company was smal but that had become a nice source of profit for them in recent years.

  Now, I should probably say a few words here about why those sales were dangerous in the early days but perfectly fine once the business became firmly established. It has to do with risk. Whenever you extend credit to a customer, you run the risk of not getting paid and being stuck with having to cover the cost of whatever you’ve sold, plus delivery charges. The bigger the sale, the greater the risk. It’s general y a bad idea to take that risk on a large, low-margin sale before your business becomes viable—that is, able to sustain itself on its own, internal y generated cash flow.

  On a $2,500 sale with a 30 percent gross margin ($750 in gross profit), you’d lose about $1,750 if the customer went out of business or just refused to pay for whatever reason. On a $25,000 sale with a 10 percent gross margin ($2,500 in gross profit), you could lose $22,500. Granted, it’s tempting to go for the $2,500, particularly when the sale seems like an easy one, but—before your company has reached viability—you have to guard your start-up capital like the crown jewels. You can’t afford the risk of losing a big chunk of it al at once. That $22,500 could be the difference between success and failure.

  The picture changes, however, once your company becomes viable. Not that you should ever be blase about the possibility of losing money. It’s stil important to do thorough credit checks on customers, especial y high-volume ones. But if you know you’l survive even if you get stiffed, you can accept some of those high-volume, low-margin sales. You just have to make sure they don’t become such a big percentage of your total sales that not getting paid for them could jeopardize your entire business.

  As Data-Link’s core business of high-margin sales had grown, Bobby and Helene had been able to do more and more high-volume, low-margin sales, and it had paid off handsomely for them. In their monthly income statements, they’d created a separate line for these special sales and kept a close eye on it. Whenever such an opportunity came along, they would decide whether or not to accept it based partly on how their regular low-volume, high-margin sales were doing and partly on how confident they were of getting paid.

  Thanks largely to the special sales, they’d grown accustomed to doing between $250,000 and $300,000 a month in overal sales, and so they were concerned when they noticed a significant drop one month. Then again, one month’s drop can be an aberration. If it happens two months in a row, you start to wonder what’s going on. After three months, it’s “Houston, we have a problem.” Bobby and Helene were wel beyond that point by the time they came to see me.

  “Look at these numbers,” Helene said, pointing to a spreadsheet for the past few months. Special sales were zero.

  “OK,” I said. “Why is this happening?”

  “We don’t know,” Bobby said.

  “The answer is important,” I said. “Maybe you’re doing something wrong that you can change.”

  “How do we find that out?” he asked.

  “You can start by cal ing up customers who’ve done special sales in the past. Ask them why they haven’t come back to you lately. Meanwhile, let’s think about what you can do if the special sales never come back.”

  “That would be horrible!” Helene said.

  “No, it wouldn’t,” I said. “You have a wonderful business. You’re making good money on it even without the special sales. But if you lose them, you’l probably want to find another source of revenue.” I didn’t have to explain. They knew that they’d reached a saturation point in their main line of business. Their regular sales had been more or less stable for four or five years. “While you’re investigating the drop in special sales,” I said, “think about ways to expand something else you’re doing. Then we’l get back together.”

  When we reconvened a couple of weeks later, Bobby and Helene reported that the special-sales decline appeared to be happening for several reasons. For one thing, there were more competitors offering these products. For another, the Internet al owed customers to shop more and pay less. In addition, one big customer had stopped buying, claiming that some tapes it had bought were defective. That turned out to be untrue, but the customer was no longer placing orders. “Given al this,” I asked, “can you get back in the game?”

  They weren’t sure. The special sales came in via the Internet, and nobody could predict when one would show up. The best the Stones could do would be to improve their chances by upgrading their Web site and working on their search engine placements. But they said there was another opportunity they could go after. A couple of years earlier, they had begun sel ing cabinets and cases for firearms, adding them to the mix at the urging of a major supplier, a manufacturer of office furnishings that made gun cabinets as wel . Recently, the manufacturer had told Bobby and Helene they were missing out on sales because Data-Link was not an approved vendor of the General Services Administration. The Stones had submitted an application shortly thereafter and won GSA approval, opening the door for sales to local police forces and other gove
rnment agencies around the country. “We’re doing a couple thousand a month in GSA sales right now,” Helene said. “The average sale isn’t as big as the average special sale, and the gross margin is lower, but the opportunity is basical y limitless.”

  “So where are you going to get the biggest payoff over the next five years?” I asked.

  “Wel , obviously GSA,” Bobby said, and Helene agreed. So did I. By and large, the special sales were one-shot deals. The buyer might never come back for another one. The sales to government entities, on the other hand, had the potential to become repetitive. That meant Bobby and Helene could build a business around it over time. In fact, their GSA sales quickly grew to more than $40,000 per month, and—after they did considerable work on the Web site—some of the special sales came back.

  But what made me happiest about the episode was the Stones’ ability to answer, by themselves, the question of what to do. They could answer it because they knew their business. They had a firm grasp of the numbers and could use them to make smart decisions for the company.

  Ask Norm

  Dear Norm:

  I am a Korean-born female. I majored in sociology as undergraduate and worked as magazine reporter. After that, I spent two years in USA got my MBA at Wharton, and came back to Korea. I did business planning at Citibank Korea for five years. I left due to boredom and joined an established Internet company in Korea. Here is my problem. My husband got a job offer from a Korean-run start-up in Los Angeles. I want to go with him and start my own business in USA but I’m not sure I can be successful, since I have very little connections, knowledge, and some language limitation. What do you think?

  Jeongwon

  Dear Jeongwon:

  I think you should fol ow your dreams. To me, success isn’t about achieving a specific goal but rather about having the courage to try. Of course, you want to build a successful business, and you probably wil . The factors you consider handicaps are easily overcome in this day and age. Given your background, I’m sure you’l have no trouble with language or connections, and your experience is fabulous. More important than the company you build, however, is the life you lead. If you have a dream and don’t fol ow it, you’l regret it forever.

  —Norm

  Love Thy Business

  Working with the Stones has been as rewarding an experience for me as it has been (I hope) for them. One episode in particular imparted a lesson that I think every businessperson should take to heart. It happened as a direct result of the Stones’ creative use of the Internet as a sales tool.

  Through the Internet, they had developed relationships with customers al over the world, one of which—Bobby learned—was a Canadian manufacturer of high-quality media storage cabinets. As it happened, Data-Link sold such cabinets, but it couldn’t afford to carry the Canadian company’s products because the U.S. distributor had set the prices too high.

  Then, in the spring of 2002, Bobby heard that the Canadian manufacturer was changing its distribution strategy and looking for four or five independent companies to be its U.S. representatives. He immediately cal ed the international sales manager, who said he would be coming to the States to interview candidates. Bobby asked him to include Data-Link on the list. The sales manager readily agreed and made an appointment to stop by. He had no idea what he was getting into.

  The sales manager was used to doing business with companies located in office buildings or industrial parks. The rep firms on his list al worked out of suites with spacious offices, modern furnishings, water coolers, and other trappings of mainstream business life. Whenever he arrived for an appointment, he would be greeted by a receptionist who would offer him coffee before leading him to a conference room, where he’d meet with people in suits.

  So you can imagine what he must have been thinking as he pul ed up in front of the Stones’ house in a middle-income, residential town on Long Island, New York. Helene Stone answered the door, holding her then three-year-old granddaughter, Rebecca, in her arms. She said hel o and cal ed for Bobby, who came upstairs from the basement, shook hands with the man, and asked him to walk around to the rear of the house, where the business entrance was located. When he got there, Bobby ushered him into Data-Link’s basement headquarters.

  There was hardly room to move. The place was packed with desks and chairs, fax machines, computer equipment, filing cabinets, storage racks, and boxes of products waiting to be shipped. Bobby was oblivious to the mess. For him, it was simply a by-product of success. The sales manager, however, looked around in disbelief. Winding their way through the clutter, they came to a narrow, steep set of stairs and climbed up to the first floor, where Bobby invited his guest to take a seat in the dining room that served as their conference room.

  “He was in shock,” said Helene. “I mean, real y. He kept looking at us, like, ‘What is going on here?’ There’s Rebecca, dancing her way across the living room, and I’m chasing after her while Bobby is talking. At least Bobby wasn’t in shorts. He put on pants and a shirt for the occasion.” Most of al , said Bobby, “he wanted to know how we did business. He couldn’t believe the numbers we were churning out. It just blew him away that we were running the business out of a basement with no sales force. He had a mil ion questions.”

  And Bobby was delighted to answer al of them. He loves talking about the business, as does Helene. The business has been an adventure for them, fil ed with discoveries, chal enges, and triumphs. What the Stones lack in trappings, they’ve made up for in resourcefulness, particularly in the area of sales. Among other things, as I noted above, they’ve figured out how to use the Internet to turn the traditional sales process on its head.

  Instead of going out to knock on doors, they’ve set it up so that customers get in touch with them. Bobby tried to explain to the sales manager how it works—how they get great placement on search engines; how they identify trends and use the information to decide what special promotions they should run; how they’ve vastly expanded their market and also improved their col ections, since a higher percentage of sales are paid for by credit card.

  The meeting lasted for about an hour and a half. When it was over, Bobby and Helene showed their guest out by the front door. A week later, he cal ed back: “Welcome aboard,” he said. He’d visited some twenty companies and selected five to be distributors. “I’m sure you’re going to do a great job.”

  But the Stones didn’t find out what had real y happened for another year. Shortly after the first anniversary of their meeting, the sales manager cal ed to say he was coming back to town and would like to take the Data-Link staff out to dinner. He knew the routine by then. When he showed up, he parked his car, walked around to the rear of the house, and knocked on the basement door. The Stones were waiting for him. He said he wanted to speak with them for a few minutes before going to the restaurant.

  “You should have seen the notes I made after my last visit,” he said, as he settled into a chair in the living room. “I wrote, ‘This company is either going to make it big or do nothing at al . I can’t figure it out.”’ Back in Canada, he’d told his col eagues al about Data-Link. They shook their heads and laughed. Then he told them he was choosing Data-Link as a distributor. They thought he was nuts. He said he’d take ful responsibility. There was just something about Bobby and Helene and the way they talked about what they did that made him think it was worth the risk. And he’d been thoroughly vindicated. Data-Link had outsold the other four U.S. distributors in the first year. “You far exceeded our expectations,” he said. Now he wanted to take the relationship to the next level. He hoped that the Stones would start promoting a wider range of his company’s products. They agreed.

  So what convinced the sales manager to go with them in the first place? At the risk of sounding ridiculous, I’d say it was love—specifical y, the love that Bobby and Helene have for their business. You can’t fake the kind of enthusiasm they have when they talk about it. Those feelings have to come from the heart.

 
I have similar feelings about my business. When most people visit my company and look around one of my warehouses, al they see are boxes—

  hundreds of thousands of boxes neatly arranged on shelves that rise up to the ceiling, almost fifty-six feet above the floor. But when I look around that warehouse, I see something different. I see a fabulous business that my employees and I have built from scratch. It sounds sil y, but the smel of cardboard gets my juices flowing.

  I don’t think it’s possible to be a successful entrepreneur if you don’t feel that way about your business. Whatever your company does, you need to believe in your gut that it’s the most interesting, exciting, worthwhile enterprise you could be engaged in at that moment, or you’re going to have a hard time convincing anyone else—employees, customers, investors, whoever—to make commitments to you. If I thought storing boxes on shelves was boring, I never would have been able to attract the great people I work with, and we wouldn’t have been able to accomplish what we’ve done.

  Fortunately, I’ve found every aspect of records storage fascinating from the start. I just love showing off our facility to visitors, and I’m sure my enthusiasm is contagious. Enthusiasm usual y is. In fact, genuine enthusiasm is one of the most powerful forces in business. It can help you overcome a lot of obstacles, as the Stones demonstrated.