It may seem like, even after you’ve deemed your business successful, a steady stream of reliable income may never be quite in your grasp. In typical business fashion, some months may out-produce (sometimes quite significantly) than others. The key to producing reliable income is to have multiple profit centers.
What are Multiple Profit Centers?
Just as a baker uses a recipe to create the same result over and over again, so too should any entrepreneur. Your money-making recipe may be an ad that consistently brings in business, a networking meeting that creates results, or some other method. In fact, it may be that the reason money is called “dough” is because you make your dough by using a reliable business recipe.
The problem for most home-based businesses is that they learn one good recipe, stick with it, run it into the ground, and never bother to figure out another one. The owner has learned only one method of making a buck. The problem with having just a single moneymaking formula is that all businesses run in cycles. Even the best recipe can’t be 100 percent reliable in the face of a natural business cycle.
For example, Starbucks knows that coffee sales spike in the winter and drop off in the summer. Ice cream shops know that their business cycle is exactly the opposite. No matter how good an ad might pull in the summer, getting people to buy ice cream cones in January is no easy feat.
Once experience has taught you, often the hard way, what your business cycle is, you will want to minimize its effects on your business. One of the best ways to do that is to have multiple recipes, or “multiple profit centers,” a term coined by Barbara Winter in her great book, Making a Living Without a Job. The theory is essentially this: To succeed long-term in business, you need to diversify your income.
Multiple Profit Centers diversify your income strategy
Think about the stock investor. Does he own just one stock? Of course not. That stock may go up, but it may go down. Having more than one stock is a hedge against the business cycle. By owning several stocks, he ensures that when one stock does go down, the likelihood of taking a big financial hit is remote. His income is diversified.
As a small business, your income should be diversified too. There are two ways to do this. Either you can create a new “division” of your business, or you can introduce a new product.
Think about Amazon.com (which, by the way, started out as a home-based business.) Amazon began by selling books. Before long, it was seemingly selling everything. Jeff Bezos, Amazon’s founder, knew that by creating different profit centers, Amazon would have a much greater chance of remaining solvent. When book sales are down, CD sales might be up.
Starbucks on the other hand, introduced new products. Knowing that its business slumped in the summer, Starbucks began to sell slushy-type coffee drinks. That’s a different profit center than hot coffee, and reduces the impact of its seasonal business cycle.
The lawyer may want to add a divorce practice to his wills and estates practice. The photographer can add portraits to his wedding portfolio. An architectural drafter might want to consider adding home inspections to the business. The important thing is that self-employed entrepreneurs create several recipes, so that you have a few different ways that bring in money.
Follow the lead of Multiple Profit Center success stories
Success leaves clues. Amazon and Starbucks are two of the best businesses around. One thing they share is an understanding that multiple profit centers are an essential element to business success. By diversifying early, they made sure that money would continue to roll in. It’s an important lesson for any entrepreneur.
By Steve Strauss
Steve Strauss is a senior small business columnist at USA TODAY and author of 15 books, including The Small Business Bible.