Good businesses have margin

In design, "margin" provides multiple functions. Arguably the most important is the space (or margin) between elements. It allows your design to breathe.

Margin is important in other areas of life as well. Especially business.

Good businesses have margin. 

Profit margin? Yes.

But also margin for your time, your emotional and physical health, your relationships, your sanity, and your integrity. You're a human, and humans need breathing room.

A story from my life

In my early 20s, I opened a skateboard and snowboard shop with my friend. I'd dreamt about it since I was a teenager. I was passionate about snowboarding, and I'd spent two years working on the manufacturing side. I was looking forward to earning a profit from doing something I loved.

But, it was a "low margin" business in every way:

  • Low markup on the products we sold (buy a skateboard deck for $32, sell for $50).
  • High complexity (ordering, employees, inventory, sales tax, cash flow).
  • High risk (you risk your money ordering something you hope a teenager will think is cool).
  • High stress (theft, capital).
  • Long hours, low pay for owners.

We never really acknowledged how little breathing room we had in the business; we were in too deep! We just kept “adding more” hoping it would increase our margins. We added a mini-ramp, did events, published a magazine, ran contests, joined a retail collective, and started doing bike repairs. 

Looking back on it now, I can see we were in a dangerous cycle.

It's something the podcast 99% Invisible explored here:

Adding more and more layers to a system intended to avert disaster often makes catastrophe all the more likely.

We were essentially "throwing good effort after bad fundamentals.” Our primary business model was lousy; adding more complexity didn't fix that.

And here's the thing about low-margin work: it eventually leads to ruin. The margins rarely get better, but the sunk costs get worse. Every month you dedicate to the bad business reinforces your desire to "make it work."

Sidenote: If you’re employed by a “low-margin” business, do everything you can to get out. Your boss will download their anxiety, lack of health, and mania on to you. They’ll make YOU feel the pressure THEY feel. Things won’t get better; get out as soon as you can.

We eventually pulled the plug on the Real Deal and closed it two years later.

Optimize for margin

What's the answer for aspiring indie entrepreneurs?

Look for business models that have good margins, with minimal complexity. And, choose work that gives you lots of breathing room.

I realize this is easier said than done, so I'll provide a few observations:

  • Profit margins in SaaS can be 80% or higher, which is nice for indie founders. (However, finding and executing on a profitable SaaS idea is difficult!).
  • Don't ignore opportunities in consulting! Yes, you're "trading time for money," but some markets are desperate for good help (and will pay generously to get it).
  • Create boundaries for yourself. My sister is a freelancer, who naturally stays up late, and sleeps in. She interviewed for a job that would require her to wake up at 6 am. She decided not to pursue it because she knew it wasn't the right fit.
  • Don't try to optimize on top of bad business fundamentals. If your core business isn't working, put your energy into finding something else. Don't try to iterate yourself out of the problem (adding more "stuff" doesn't help).
  • Look for markets where there is growing demand. Commodity products and services tend to have low margins. But markets with a relatively low number of good suppliers, but high demand, can charge more.
  • Sometimes, changing your positioning can earn you better margins. Read this story for more on that.
  • Don't settle. If you find yourself in a bad situation, look for other options. You might have to do "low margin" work to pay the bills, but keep searching for better opportunities.

I'll give Patio11 the closing word:

If you want something small and beautiful, please, please pick something with fat margins (like software) and customer willingness to pay. Margins create margins. You need massive scale to afford “that thing you want” in a low margin environment. There are great businesses in the world that have low margins, but they rely on iron discipline and scale.

I hope this was helpful!
Justin Jackson

Published on January 10th, 2020
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