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Multiple Revenue Streams and Growing Annuities

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Most creative businesses only have one source of income.  Designers, photographers, stationers, florists and planners get commissioned to do a project and, when the project is over, have to find another one to generate revenue.  Throw into the mix some seasonality and you have one tough business.  Quite literally, you do not know what tomorrow will bring.

Today’s economic environment has made it painfully clear how risky it is to rely on one source of revenue.  Yet, given the choice, most creative business owners would STILL rather invest all of their marketing, PR and psychic dollars to chase after the next client than develop a new revenue source.

The power of another revenue stream is exponential.  For example, take a caterer starting to sell cooking classes as part of her service to her clients.  If she owns/rents her kitchen, the more it is used, the cheaper it is for her.  If she has salaried staff, the more she uses them, the cheaper they are.  The more food she buys, the better pricing she will get.  If she turns the service into more than just a one-off event, she has extended her client beyond the event.  If her catering business slows, the cooking classes might take up the slack and vice-versa.  Oh, and don’t forget about the power of cross-marketing. 

My only caveat to adding another revenue stream is that it HAS to be directly related to the core of your creative business.  No photographers starting a travel agency please.

If you are able (or willing) to create another revenue stream for your creative business, why not reach for the holy grail — a consistent and growing annuity rather than a one-off business? 

Take the caterer starting cooking classes again.  She could offer one class as part of her catering service or she could offer annual memberships.  Let’s say the membership included four classes per year and was paid monthly via automatic deduction from a credit card.  Different rates for different memberships.  Yes, doing one-offs is easier – the caterer gets paid a bigger number, does the class and she is done.  However, she is in the same position as she is with her core catering business: constantly chasing after new clients.

A membership program offers her the chance at a growing annuity.  Why?  Presuming everyone is happy with the service and wants to continue their membership, then each year will build on the next in terms of revenue until the existing annuity stream will be larger than that from new business.  For instance, if the membership is $100 a year, everyone stays and there are 25 new members each year, then in year one – the caterer would get $2,500 from new clients; in year two, $2,500 from new clients and $2,500 from existing clients; and in year three $2,500 from new clients and $5,000 from existing clients.

If Aesop were to write The Tortoise And The Hare for creative businesses, a growing annuity would be the tortoise, seasonal one-off large projects the hare.  We all know how that story ends…

The Fosbury Flop

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In the 1968 Summer Olympics, Dick Fosbury won the gold medal and set an Olympic record (7′ 4″) in the high jump using the Fosbury Flop.  At the time, the prevailing methods were the scissor kick or straddle kick.  The Fosbury Flop is back first and the jumper flings her legs over the bar together.   Today, the Fosbury Flop is the most widely accepted technique for the high jump and was used by Javier Sotomayor when he set the world record in 1993 (8’0.46″).

Fosbury was able to perfect his technique because the landing area went from sawdust to foam mats (otherwise he would have broken his neck).  Once he knew he wouldn’t paralyze himself, he did not look back.  He was 21 when he won the gold medal and had been working on his technique from the time he was 16.

The lesson?  There is a better way to do what you are doing now.  In most cases, the words “cheaper” and “better” don’t usually go together.  Cheaper usually means someone loses, you or your client and better means more expensive.  However, if you change your model, what your creative business provides can be less expensive for your clients AND a better value for both of you.  Whether you begin charging fees vs. markups, outsourcing everything that is not at the core of your art, or developing a longer revenue stream, there are ways to do it differently.  No matter what you choose to do, expect resistance.  Everybody laughed at Dick Fosbury right up until he kicked their ass.  So imagine what it was like for him as he was perfecting his technique and losing to the old guard. But a better way is a better way and WILL prevail if you have the fortitude to keep going through the Dip.

This all brings me to the hot topic (and controversy) I created when I said that I wanted to rid the world of “Day Of” planning.  I stand by what I said.  The idea that a planner can ply her craft in a few days belittles the art.  Not to say that the service isn’t valuable to both the planner and the client, but it is not planning, it’s helping.  My definition of “day of” is that a planner doesn’t meet the client or provide any service for them until a few weeks before the wedding.  If you are doing more work than that, but are calling it “day of”, you are planning.  Although it isn’t on her site or blog (which I love — it doesn’t belong there), Traci Romano from Traci Romano Events has a Lady in Waiting service that is brilliant.  Hers is a better way — a way that honors the artist that she is (i.e., the service is NOT planning), provides value to both her and her client, and doesn’t diminish the brand she has worked so hard to build.  Just imagine if Traci decided to extend the service to her brides after the wedding — maybe for her grooms to provide as a first anniversary gift?  Who knows where that could go.  It might look the same as “day of”, but it’s not.

Business Process

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I was in Las Vegas last week attending the Las Vegas Market with my long-time client, Vicente Wolf.  Vicente was being honored as a Design Icon by the Market and gave a presentation to a crowd of designers and furniture manufacturers.  During the question and answer session, Vicente was asked repeatedly about his business process.  The crowd was incredulous that Vicente did not show any work (other than from past designs) or provide a proposal before he was hired.  And then, this past Sunday, while watching Mad Men, there was a scene where Don met Conrad Hilton who asked him to evaluate his potential ad campaign.  Don refused, but then acquiesced giving just a taste of his opinion.  When asked what he wanted, Don replied that he wanted a chance at Hilton’s business.  Hilton questioned why Don didn’t ask for more – to which Don basically responded: one step at a time.

The integrity of what you do as an artist has to be reflected in how your business operates.  Simple enough, but so much easier said than done.  How many of you send proposals before you are hired?  Provide design after you write your proposal?  Don’t clearly establish the boundaries of your time?  Even more important, how many of you don’t have an established, written operating structure?

The hunger to please and show your work is a very powerful mistress.  The irony is giving into the seduction actually belittles the work.  Your business process has to reflect the value your creative business offers to its customers.  It is linear and it builds on itself until the final product is delivered.  As Don said, one step at a time.

Once your core process is established, you build a solid foundation from which you can go anywhere.  And, for me, new business development is where it really gets fun.

Expert Advice

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By seeking the advice of those who possess knowledge and know-how you do not, you broaden your perspective and improves your ability to manage your creative business.  Those who see the world differently need to hear your creative business’ story told in a language they can understand.  Just having to learn what information is necessary and how it to obtain it for your advisors is invaluable.

However, you may not be at a place in your creative business where you feel you want or need a Board of Advisors.  No judgement there.  What might be most important for you is to receive feedback and other relevant information from industry professionals.  In this case, there are myriad industry conferences to choose from.  Conferences can be useful if you are trying to broaden your skill set as an artist, be exposed to a lot of industry ideas and trends, and, mostly, have the opportunity to network with your peers.

No matter what you choose, you have to choose.  As a creative business owner, you need to be constantly seeking to enrich yourself by learning from others.  The world we live in today is far too complex and competitive to think that you can survive by standing still.

However, regardless of how you choose to educate and inform yourself, please remember that it is YOUR creative business and for YOU to choose what is best for it.  The idea of industry standards for creative businesses is an oxymoron, as is the idea that there is a “right” business model.  No matter what any expert might suggest, an expert’s role is not to provide you with THE answer or THE way.  There is no such thing.  Experts are there only to provide you with information and insight that will help you make the best, most informed decisions for your business.  Ultimately, you as an artist must define your art, not your audience.  Your creative business is no different.

Spend Smart

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One of the hardest things any business owner has to decide is when and how to invest in the business.  Regardless of whether the decision is large or small — from hiring additional staff to buying a building, you make it on the leap of faith that it will pay off.  You assume that tomorrow will be bigger than today, or at least the same size.  As entreprenneurs of the first order, creative business owners are skewed to believe in the possibility of a larger future — otherwise you probably would not have started your creative business in the first place.  However, as a business owner, the decision to (re) invest has to be more reasoned and planned than simply a leap of faith.

I have suffered terribly from building a huge kitchen on the thought that “if we build it, they will come”.  It was the biggest business mistake I have ever made (and I have made some serious lulus).  We over-built, over-spent and over-staffed and went broke in the process.  If you have a successful business, the best solution is to let cash flow fuel growth.  Build what the business can support on its own.  Borrowing beyond the capacity of the business or taking on investment is a tough way to go for either a concept unproven at the scale you want to take it to or an unproven concept altogether.  That being said, you invest every day in your creative business and you do need to grow.  My advice is to do what is necessary to grow the core business and diversify current cash flow first, expand for the longer term second.

In the best case, you can use your investment to grow and diversify current cash flow to fuel longer term growth.  For instance, if you are a stationer who wants to start a private DIY collection which will require a significant investment in techology and software, why not build a demo site and try to pre-sell the idea.  First, you will see what the market is and if it has potential.  Second, you will generate revenue that will contribute to your investment in the project.  And, third, these early adopters will hopefully be the fans you need to make the idea a success.

I am reminded of Craigslist, which generates $100 million with 30 employees — one terrific business.  Whatever new area it may choose to go into will certainly be fueled by internal cash flow without worry about what investors or lenders might think or do.    However, in 2004, rather than buy back the shares of an executive who wanted to sell, it let those shares be sold to Ebay.  In 2007, Ebay set up its own classified advertising business, Kijiji.com.  The two are now embroiled in a very nasty lawsuit.  Lesson learned.  Other people’s money always comes with a price.  If your creative business can fund the investment on its own, it should.

Time Is Money

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The value of any creative business is in design, not production.  To the extent possible, pricing should be focused on the design work your creative business does rather than production.  In a perfect world, you would make most of your money from being commissioned to design the art and very little, if any, from the cost of its actual production (i.e., the client would pay what it costs you to produce the art).

However, getting “commissioned” to create your art just may not be possible and marking up your costs of production is the only way you can go.  The focus then has to be on maximizing the time between completion of design and the actual production of the art.

Too often, the art a creative business has been hired for is not actually designed until a few weeks (ok, maybe a month) before the installation date.  In the worst case, design is done on the fly at the time of installation.  Apart from not being able to do your best, but only the best you can do, working this way also makes it virtually impossible to make money.  Two reasons.  The first is that you have likely priced your art well beforehand and are trying to “back” into the right budget.  The second is that you are completely subject to spot market prices.  Example, you need 1,000 candles for your event.  Order six weeks in advance and they are $1 per candle.  Order a week before and they are $4 per candle (you pay the premium for the vendor to carry the inventory to service your needs).  What happens if you only charged $3 per candle?  You just lost $1,000 instead of making $2,000.  In markets where prices fluctuate dramatically, like with perishables (i.e., food and flowers), the effect is even more pronounced.  By completing your design much earlier in the process, you give your production team (even if it is the same person) a much better chance to prepare, budget well, order in the true wholesale market and earn a proper return.

Even more important though is an idea that EVERY creative business should embrace.  The lifeblood of your business is still design. So if you are sending a proposal before you show a sample of the art you will create for your client — stop.  First of all, it is disingenuous — how can you say what something will cost before you have created it?  Second, it makes it all about the money and what things cost instead of the art you will be creating for them.

When you reach a certain stature, you can ask to be hired before you create the sample, but, for those who are just starting, show them what you can do for that budget and THEN send your proposal.  Not only does it give you the chance to upsell your work, but makes the proposal you do send a much fairer representation of the value both you and your client will be receiving.

The Pizza Guy That Shouldn’t

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During our Vermont vacation, when we weren’t lunching at Simon Pearce and when the chef of all chefs needed a night off, we were eating dinner at our favorite pizza place – Goodman’s American Pie (no website) in Ludlow.  The proprietor is a Ludlow born and raised man who literally built his oven brick by brick and found a VW bus to serve as his counter and prep area.  Mr. Goodman (never got his first name) is a one-man show and  fiercely entrepreneurial.  This year, he told us about the wholesale business he started last Winter.  The Pizza Guy as I will call him par-cooks four types of his pizzas, cry-o-vacs them and freezes them so that they are good for 8-12 months.  He then wholesales them to local grocery and convenience stores in the area; dreams of Ben and Jerry’s and Papa John’s dancing in his head.  Mr. Goodman is not only the chef, salesman and cashier, he is also the delivery guy to his wholesale customers.

Not for me to step on anyone’s dreams, but, man, makes me cringe just to hear about this new business.  Wholesale is not retail.  It only works at scale and, more importantly, only with a certain amount of working capital.  If you can not hire staff, create inventory and manage accounts receivable, the business is beyond difficult.

Here is the napkin math:  being aggressive, at retail, he probably averages 80 pies per day 160 days per year (seasonal business) at an average price of $14 = $180,000 with margins of, say, 60% (remember, he has no employees), so @$110,000 net to the Pizza Guy.  A lot of work for sure, but not a bad living.  Now add the wholesale business – he sells the same $14 pizza for $8.  So margins are now down to @30-35%, or about $3 per pie, this being generous and including the cost of storage and delivery.  Mr. Goodman says he sells an average of about 200 pies at wholesale per week.  He closes the retail store on Monday and Tuesday to make the wholesale pies and delivers them on Wednesday morning.  His accounts receivable averages thirty days for his bigger accounts.  Bottom line, best case, the wholesale business will make the Pizza Guy an extra $30,000 per year.  However, he is probably financing $3-5,000 in A/R and has to give up his days off.  Pretty clearly, he doesn’t have the money to hire staff to cook and deliver the wholesale pies.  His dream is to get into the bigger supermarkets in the area.  My nightmare.  These stores run accounts payable much longer than 30 days and will not guarantee volume.  So he could have 1,000 pizzas a week in season and none when not.  Hard to eat A/R when business is slow.

What does this have to do with creative businesses?  A basic understanding that wholesale is not retail.  If you are a “preferred vendor” at a venue – lighting, flowers, catering, etc. in exchange for giving up a percentage, then you are in the wholesale business.  Same goes for bartering.  Like Mr. Goodman, if you are not set up to service this kind of business, you are asking for trouble.  More to the point, engaging in these types of relationships is not growth, it is a distraction.  Simply, the pizza guy has to sell two wholesale pies to equal one retail sale.  Why not focus on retail?  Temporary outlets?  Store in store (maybe in the ski lodge)?  Rather than be seduced by the “volume” that wholesale offers, why not put the energy into expanding your offerings in new and unexpected arenas?  And, if you are going to enter into these kinds of relationships, know what it will take to make them work going in.  If the business is not sustainable on its own and can not be run almost independently from the rest of the business, walk away.

Simon Pearce

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During our time in Vermont, multiple trips to Simon Pearce are always in order.  There is a fabulous restaurant, pottery making and, of course, glassblowing.

When you enter the store, there is a video running with Simon talking about the history of his business, his decision to come to America from Ireland in 1981 to build his mill and shop, and what inspires him to take the company forward.  The business is private and I do not know how big or profitable it is.  However, I do know they have approximately 300 employees, a 190,000 s.f. facility in Maryland and another restaurant in Brandywine, Pennsylvania.  Over 300,000 people visit the Vermont mill annually.

So why write about Simon Pearce?  Because the business is about the art and the integrity of Simon’s vision in its production.  He talks of his apprenticeship, his years spent working with his father (a potter) and a master Irish glassmaker he admired.  The brand is mass luxury and you can see the brand direction at every turn in the store and the restaurant.  It is equally well presented at the retailers where Simon’s products are distributed.  Apologies to the webmasters, but the site does not sell the brand well — too flat and commercial for me.  But, then again, the site does its job of presenting the company’s products and doesn’t alienate its core customers.

Although I am sure sales are off this year, based on the traffic I saw at the store in Vermont and casual conversations with the store’s managers, it does not look like the company is remotely close to suffering the same fate as its competitors like Waterford Wedgewood and Mikasa.  Not to say that Simon Pearce doesn’t face enormous competition.  It does.  However, Simon Pearce succeeds because of the clarity of its brand (and glass) and the legion of fans it has cultivated during its 28 year history in the United States.

I hear all the time how the new new is going to overtake the master craftsman.  A young designer, planner, photographer, florist with a great website, blog and all things social media getting the business over those with far more experience (and style).  Simon Pearce is a lesson for those of you who are truly craftsmen not to compete at the level of the new new, but to honor the skill and artistry only a true craftsman can bring to the art.  The slicker your competition is, the purer your art should be.

The Success In Failure

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Back from an amazing and restful trip in Vermont.  For me, time away is incredibly important.  I get to recharge, think and enjoy being with my family.  There are some wonderful pictures on Cate’s blog, Tribeca Yummy Mummy.  You can see for yourself why there has only been one post in the last two weeks.

However, while I was away, I did manage to read Seth Godin’s blog and was really inspired by his post, “Competing With The Singleminded“.  The post was about trying to (or thinking you need to) keep your current methodology when your competition is willing to go a whole other way.  What I took away from the post is the exquisite irony I see in so many creative businesses:  the older and more established the business, the safer the art and the more undefined the brand.

For whatever reason, Fortune 100 businesses don’t have this fear and do, on occasion, put it all out there and fail spectacularly. Take New Coke, The Edsel and Tropicana’s New Packaging.  Hindsight says they should never have been undertaken.  Nonsense.  They all got more in failure than they might have gotten in success.  The demise of New Coke deeply engrained America’s desire for its own sense of history in Classic Coke and lead to Coke’s biggest surge over Pepsi to date.  The Edsel taught Ford the perils of bureacracy and ego out of touch with the consumer.  And Pepsi will probably have a “New Coke” with its Tropicana debacle.  Yes, you learn more from failure than success, but, for creative businesses, the more important lesson is that the more you succeed, the more you should dare to fail.

Creativity is (re)invention.  The story your business tells needs to evolve, just as your art does.  Staying with your current pricing, marketing, or operational strucuture, just because it is the devil you know is not good enough. 

Could you lose all of your business if you didn’t do your “day of” package, your hourly consultation, your pay for results program?  Sure.  Will the market accept that you won’t “throw in” additional prints or sessions like your competitors do? Probably not.  Will your vendors lose your number when you won’t pay commissions any more or let them mark-up your proposal? Yep.  Do it anyway. 

If what you are attempting to do is speak a better truth for your creative business, you really don’t have a choice.  Keeping the status quo is like a beach house on an eroding beach.  Not a question of if the house is going to fall down, just when.  Better to build a new house while the old one is still standing.

Shark Tank

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After a long, sun filled day in Vermont, I stumbled upon Mark Burnett’s new TV show, Shark Tank.  The entrepreneur-asking-for-investment show is the U.S. version of Sony’s Dragon’s Den international series.  Whether the show is your cup of tea or not, it was incredibly powerful for me to see the entrepreneurs ask the “Sharks” for money.  Yes, the entrepreneurs are self-selected to make good television, but still.

 All of the entrepreneurs told a good story.  All of them overvalued their businesses to start and almost all of them caved to a dramatically lower valuation when the Sharks put them to the test.  Those that took the money gave up a huge amount of equity (i.e., at least half their businesses).  Those that didn’t were either indignant or kicking themselves for not taking the money.  None of the entrepreneurs asked the Sharks what they were going to provide other than money when the Sharks asked for HALF of their businesses. 

For creative businesses, knowing what your business is worth and what you are going to get in exchange for giving up a  (huge) piece of your business is incredibly important.

My step-father taught me (and I learned the VERY hard way), don’t give up equity unless you absolutely have to because once it is gone, it is gone.  And if you are going to give up equity, make sure you get something more than money in the trade — operational support, marketing and PR, and strategic advice.  It is why you need the money in the first place — either to save or grow the business.  Money for money’s sake will likely not help in the long run if you don’t know what to do with it.

Then there is the thought that none of the entrepreneurs truly valued their businesses well.  Most were actually making money, but did not put a realistic multiple on the profits generated.  One entrepreneur, a pie maker from New Jersey, asked for $460,000 for 10% of his company (he wound up giving away half of his business for the same amount).  He generated $150,000 in profits per year, but thought his business was worth $4.6 million.  Another pair of entrepreneurs asked for $250,000 for 25% of a business that didn’t exist yet, but offered no part of a business generating $300,000 in profits per year.  One Shark called them pigs and, no, they didn’t take the money.  If you do not understand the true value of your business, you are at a serious disadvantage to those that value businesses for a living.  The same Shark who called partner entrepreneurs pigs also said that money has no feelings.  A little harsh, but he is right.  Unless there is a connection beyond financial, no one will invest in you or your business unless you have a realistic sense of what your business is and where it is going.

What I do think would be an incredible exercise would be to imagine yourself in front of the Sharks — what would you ask for and why?  If it takes you more than thirty seconds to answer the question, you have some work to do.

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