To Make More Money, Solve Bigger Problems
What entrepreneur does not want to make more money? The question is how to do it.
While there are exceptions, of course, in my experience and observation, the amount of money you make is usually directly related to the size of the problem you are solving for your client or customer, the barriers to entry to getting into the business, and how many other people are willing and able to solve the problem you’re looking to solve for your prospective customers. These factors are particularly important when it comes to service businesses, which is what we’ll focus on here.
Let’s consider a few of many possible examples.
Undoubtedly, keeping one’s house clean is no small problem, particularly if you have kids and pets. That said, cleaning a house requires minimal specialized skills and there is a large number of people willing and able to provide this service. So, as a house cleaner, you’ll make OK money, but nothing that will knock your socks off. In order to make exceptional money in this business, you’d need to have a large customer base and a team of cleaners working for you. You’d still be making a relatively low profit margin, but on a much larger volume of sales than if you were doing all the cleaning yourself.
Mergers and Acquisitions Advisory
In the M&A advisory business, there is plenty of opportunity to make more money than in many other service businesses. This is true despite the fact that there is a large number of providers of these services. How is that possible? Well, in M&A advisory, whether you’re advising the buyer or seller of the business, typically there is a great deal of money at stake – anywhere from hundreds of thousands to tens of millions of dollars, or even more.
In other words, these are bigger problems to be solved for your customer. In such a situation, the buyer and seller are willing to pay significant dollars, often even a percentage of the deal value, in order to attract high-quality advisors. This business also requires specialized knowledge and credentials which act as a barrier to entry, so although there are a lot of M&A advisors, it’s a relatively small number compared to what you’d see in other service businesses where the knowledge and credential requirements are much lower, or non-existent.
Family Business Advisory
In terms of having bigger problems to solve, family businesses probably end up somewhere toward the top of the list. Running a family business is very challenging, with the challenges often growing with each successive generation of the family. In such a situation, where there’s a lot more than money at stake, and the money issues themselves can be quite large, the advisors tend to make more money than your average consultant or provider of other services.
Again, in order to provide advisory services to family businesses, specialized knowledge and experience is required, so there are significant barriers to entry in this business as well. Not dissimilar to M&A advisory, as described above, family business advisors are paid quite well, with daily rates ranging from a couple thousand dollars to well over ten thousand dollars. These advisory fees can be seen as a bargain by the family business client, though, as in many cases the survival and prosperity of the family business – the engine of wealth for the family – hangs in the balance.
Tree Removal Service
The tree removal business is quite different than the services mentioned above, as it involves extensive and dangerous physical labor, combined with planning and ingenuity. The specialized knowledge and equipment required for this business typically also take a significant investment of time and resources to acquire, which places sizable barriers to entry in place. This is particularly true for the tree removal businesses that are “legitimate,” rather than just a couple guys with a chainsaw and a pickup truck.
So, given the barriers to entry and the risk inherent in cutting trees near people’s houses and other structures, it’s not surprising that entrepreneurs in the business (“legitimately” in the business) make more money than other entrepreneurs in service businesses that solve “smaller” problems and have fewer barriers to entry. There is plenty of competition in this business, but there is also plenty of business to go around, given that ongoing tree maintenance is necessary and acute tree removal needs arise on a regular basis due to hurricanes, other windstorms, and fungus/other diseases in the trees.
We could look at an almost endless list of service businesses and press each of them against these factors of the size of the problem solved, barriers to entry and number of competitors in the business, but I’m sure you get the idea already.
When you are looking at starting a business or expanding your current business, carefully consider these factors. Such an exercise is likely to give you a solid understanding of how likely it is that you’ll make more money in the business you’re considering than in other businesses that may also be options on the table. That will allow you to make a more informed decision about where to invest your time, money and other resources as you take on your next entrepreneurial venture.
I look forward to your thoughts and questions.