In many industries, entrepreneurs are rethinking their business models. We check in with five companies that are making big changes
RocketLawyer launched its online legal site in 2007, targeting entrepreneurs with a pay-per-document-download model. Things went well until the economy began falling dramatically a year ago, says CEO Charley Moore.
That's when transactions began dropping off the firm's Web site whenever customers were asked to make a credit-card payment. "We were asking them to pay for every legal document they wanted to download, and charging them a couple hundred dollars less than other sites or [the cost of] hiring a lawyer. That's a big savings, but it was still a lot of money for most folks, especially once the economy started to tank," Moore says.
Recognizing that interest in starting a business was hotter than ever, but that fewer would-be entrepreneurs had startup funding, RocketLawyer changed its business model. "We decided to go with a 'first one free' model to accommodate customers who wanted to try the service," Moore says. In addition to the free one-time download, the company established a $40 monthly membership that gives customers access to unlimited document downloads and online document storage for their company.
Revenues at the 30-employee San Francisco firm went from $1 million in 2008 to an estimated $5 million this year, Moore says, and monthly visitors at his site have increased from 150,000 to 900,000. He credits the change in his business model for converting many "accidental entrepreneurs" into long-term customers and attracting an outside investment from LexisNexis, the legal database.
Whether it's offering a free trial, partnering with a competitor, or moving business online, the Great Recession has spurred small companies to become more innovative than ever. They may be working harder for less money, but many small firms are finding ways to survive—and even thrive—by reinventing themselves.
The ThomasNet Industrial Market Barometer, a survey of 829 manufacturing and distribution firms released this month, showed 80% of respondents were coping with the downturn by diversifying into new industries, widening sales channels, expanding overseas, and increasing online marketing. A majority of the firms surveyed are small businesses, says Linda Rigano, executive director of strategic services at ThomasNet. "Business leaders are not sitting back. They're changing how they sell their products or changing their sales strategies and product lines," she says.
"Smaller and more lean companies have an ability to adjust much faster than large ones and that has served them well this year," says Thomas Harpointer, CEO of Atlanta's AIS Media, an interactive marketing and Web services firm. For instance, retailers that once "had great difficulty determining whether the Internet was friend or foe" have begun embracing their online customers, he says. Many have found ways to overcome customer's objections to online shopping, including beefing up their return policies and instituting free shipping.
Greater Share of Stomach
Specialty's Bakery & Café, a regional company that owns and operates sandwich shops along the West Coast, revamped its Web site this year and now finds 40% of its revenue coming from online orders. "People can order their sandwiches or salads online, customize them, save them as favorites, and pick up without waiting in line," says Angela Pace, vice-president for marketing.
Online ordering "helps us in fighting for share of stomach," Pace says. "When someone goes out for lunch, we don't compete with all the other lunch places around because our customer has already put in an order before leaving their building." While many other bakeries have suffered or closed their doors in 2009, Specialty's "has been staying above water" this year, she says.
The same can be said of Industrial Specialties Manufacturing, a $5 million, 15-employee, Englewood (Colo.) outfit that makes and distributes miniature pneumatic, vacuum, and fluid circuitry components. President James Davis, who purchased the 27-year-old company in 2006, invested in modernizing operations, put its 300-page paper catalog online, and moved into a new facility.
His improvements helped increase sales by 15% in 2008, but by early 2009 things looked dire. Business from longtime automobile and marine clients dropped dramatically, anticipated new orders didn't materialize, and existing contracts were cancelled.
Instead of panicking, Davis started studying trends. When he saw that the health care, medical, and pharmaceutical sectors had not been hit by the economic downturn, he began actively seeking new customers there. He also hired an employee who specializes in making custom parts in small quantities that he knew his competitors couldn't match.
"At the start of 2009, the forecast was pretty bleak. But during the worst of the economic downturn we were holding our own and keeping afloat," Davis says. Recently, orders have risen enough to make him optimistic that his 2009 revenue will at least match 2008's.
Revenues are down by half this year at PacketTrap, a San Francisco software provider, but CEO Steve Goodman says that changing his pricing model and target customer has increased his customer growth and increased his deferred revenue by 400%.
"We are an early-stage Silicon Valley software firm, and we were growing at a pretty good clip, by about 20% a quarter," Goodman says. By third quarter of 2008, however, sales started going south. After the stock market crashed, PacketTrap's customers decided to rein in their IT spending. "Budgets were frozen, projects we had counted on for revenue dried up and even developed deals were not closing," he says.
The company decided to change its pricing model radically, going from selling its remote network monitoring software outright to renting it on a two-year contract basis. And instead of marketing specifically to in-house corporate technology officers, PacketTrap now targets managed service providers, many of whom are entrepreneurs.
"We've decided to go after guys who like to pay monthly as opposed to all up front. It's 1/24th of the cost of buying outright, and in-house IT departments are going away as IT is increasingly being outsourced to firms that can monitor their client's networks remotely," Goodman says.
While the firm had to do substantial belt-tightening during the early part of this year, Goodman says the changes he made as a result of the downturn have provided a silver lining. "Even though our top line revenue is down, our customer growth is up from 20% a quarter to 60%," he says. "This model is scaling way better than anyone expected."
That look-at-the-bright-side attitude may be more widespread than expected. The ThomasNet survey found that 35% of respondents projected growth in 2009 and 75% expect improvement in their business by the second quarter of 2010—or sooner.