Know your market

We have some house guests, a young couple from Ecuador, he having been an exchange student of ours a dozen years ago. On May 8 I showed them the front page of the Seattle Times and an article about how a survey showed the high cost of living is the number one thing people don’t like about the area (taking over the perennial top item, traffic). Cost of living really means the cost of housing.

She read the article, saw how home prices are going up about 15% a year and commented how people will be rich if this keeps happening. So I gave her a short lesson in economics.

  • Just because the price goes up doesn’t mean it’s money you can spend.
  • What goes up can go down, as we saw 10 years ago.
  • When the home prices go up so do your property taxes. Ours went up about 15% this year.
  • And, someone has to be able to pay the high prices and there’s a limited number of people who can afford the high-end homes (median home price in Seattle is $819,000 and on the Eastside it’s $943,000), especially if prices keep rising. Well-above market priced houses take a lot longer to sell in our neighborhood.
  • If you sell, you have to find somewhere else to live (and unless you plan to move out of the area you’re paying a high price for a new place).

The above (especially the fourth point) applies to our everyday businesses also. The larger the size of the firms in your target market the fewer there are, i.e. you have a limited number of customers. According to Hoover’s (D&B) and NAICS.com only about:

  • 4.5% of companies have sales greater than $2.5 million
  • 3% of companies have sales greater than $5 million
  • Less than 2% have sales greater than $10 million

In addition, about 90% of businesses do less than $500,000 in sales.

Bottom line, you have to know your market. It doesn’t matter if you’re selling widgets, advice, service, or anything else. I know in the buy-sell world it gets more competitive as the company and deal sizes get larger; just look at what’s going on in the Private Equity market where acquisition prices are getting ridiculously high.

When it’s competitive, it’s when service plays a big part. It’s where small business shouldthrive by being caring, nimble, and fast. The continually profitable companies recognize and do this.

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