Selling a business is a milestone many entrepreneurs aspire to reach. It signifies the culmination of years of hard work and risk-taking. But it’s a journey marked by both emotional and financial challenges. While the financial rewards often dominate discussions, the emotional complexities and post-sale decisions can be just as impactful. My journey through the sale of my employer-based business provides a window into navigating some of these challenges and making thoughtful choices about life after the deal.

Building a Legacy and Letting Go

The company I sold was more than just a business; it was the culmination of years of effort and dedication. What began as a way to sustain my livelihood after my employer faced hard times grew into a thriving and profitable enterprise. After years of success and steady growth, the business caught the attention of Interleaf, a publicly traded company, and became an attractive acquisition target. Selling to Interleaf was a significant milestone in my journey, but it was far from the end of the story.

As part of the deal, I was offered the role of Vice President of Operations for Interleaf’s services division, where I oversaw the integration of my business along with two other acquisitions. In addition to the cash I received at closing, my final compensation was tied to a one-year earn-out agreement, contingent on meeting ambitious revenue targets, which we exceeded. While I saw this as an opportunity to watch my “baby” thrive and grow with the backing of a publicly traded company, I also struggled with the loss of autonomy and the realization that I was now just a cog in a much larger machine.

The excitement of the transition was short-lived, as the challenges of adapting to a new corporate structure quickly emerged. About a year and a half later, Interleaf was acquired by another company, and the focus shifted away from the services side of the business that I managed. My division was seen as a liability compared to the product development and engineering assets, and I was directed to shut my division down. This change, coupled with the cash and stock my partner and I had received from the original sale, created an opportunity to reacquire our original business. Along with my former company, we also acquired another business that Interleaf had previously purchased, aiming to achieve greater customer and industry diversification for our new enterprise. These moves were not only strategic but also reflected my commitment to protecting the company’s employees, customers, and reputation.

The Final Farewell and Reinvention

Being back in the driver’s seat, fully in control of my company, was far more satisfying than working within a corporation. However, most of the proceeds from the original sale had been reinvested into the new business, leaving me without what I jokingly referred to as my “go-to-hell fund”, a financial cushion I had grown accustomed to after the first sale. Additionally, managing a business that spanned three states and time zones began to feel monotonous, and I realized I was craving a new challenge. After two more years, we decided to sell the business to an individual relocating from California to Colorado for a lifestyle change.

This time, the transition felt much more final. Although the agreement included a six-month consulting period to ensure a smooth handover, my services were deemed unnecessary after just a few months. The abrupt end hit me much harder than my first sale. Saying goodbye to the employees and the business I had nurtured for so many years felt like severing a deeply personal connection. For the first time, I truly experienced the profound emotional loss that often comes with selling a business.

However, sitting idle was never an option for me. As my wife often says, “I married you for better or worse, but not for lunch every day,” so after the sale of my second business, I redirected all my energy into several real estate development projects. This pivot kept me productive and provided an outlet to channel my emotions and energy into new challenges. Though the transition came with its own difficulties, it gave me a fresh perspective on starting anew. This shift not only offered a new sense of purpose but also helped fill the emotional void left by the sale.

Preparing for the Transition

When preparing to exit by selling your business, it is essential to navigate both the emotional and financial complexities of the process. Experts from merger and acquisition firms like MidStreet, who work closely with sellers, emphasize the importance of thorough planning before finalizing a sale. To ensure a smooth transition, consider the following strategies:

1. Anticipate the Emotional Impact: Recognize that selling your business is not just a financial transaction but a major life transition. Emotions such as grief, relief, and uncertainty are normal and should be acknowledged.
2. Define Life After the Sale: Having a clear vision for the next chapter can ease the transition. Whether it’s starting a new venture, pursuing hobbies, or traveling, a well-thought-out plan provides structure and purpose.
3. Seek Support: Surround yourself with advisors and peers who understand the nuances of life after selling a business. Their insights can help you prepare for and navigate the ups and downs of the process.
4. Reinvest Thoughtfully: Whether you aim to grow your wealth or launch a new business, diversify your investments and consult with financial advisors to ensure a balanced approach.
5. Focus on Legacy: For many entrepreneurs, ensuring the continuity of their business and protecting their employees and culture is as important as financial gain. Selecting the right buyer and structuring the deal accordingly can safeguard your legacy.

Dealing with Post-Sale Emotions

The emotional rollercoaster associated with selling a business is well-documented, yet often underestimated. Entrepreneurs spend years and even decades pouring their heart and soul into their companies, making them an extension of their identity. Selling can feel like losing a part of oneself, leading to feelings akin to grief. For some, these emotions are compounded by a loss of purpose, as the day-to-day demands and responsibilities that once defined their lives vanish overnight.

Post-sale challenges are not uncommon. According to Forbes, many entrepreneurs struggle to adapt to their new roles, particularly when staying on temporarily with the acquiring company. The loss of autonomy and the need to report to others can be disorienting.

After years of being the boss and having the final say on all business decisions, I found my tenure at Interleaf challenging. Reporting to others and losing control over my own destiny was a stark contrast to the autonomy I had grown accustomed to. During this time, I gained valuable insights about myself. As someone who is neurodivergent – a trait that had been an asset as a business owner and entrepreneur – I struggled with tolerating incompetence or uninformed decisions made by others. After the acquisition, it became clear that I didn’t thrive in environments where I lacked total autonomy. I realized that my happiness and fulfillment are deeply tied to having control over my own path.

Addressing Emotional Complexities

Selling a business is as much an emotional journey as it is a financial transaction. Entrepreneurs often describe their companies as extensions of themselves, making the sale feel like a loss of identity. After my second sale, the abrupt end to my involvement left me grappling with these emotions. However, reinvesting my time and capital into real estate provided a new sense of purpose.

Post-sale planning isn’t just about avoiding financial pitfalls; it’s about creating a roadmap for life after the transaction. Here are a few strategies to navigate the emotional challenges:

1. Define Your Next Chapter: A clear vision for post-sale life can ease the transition. This might include starting a new venture, volunteering, engaging in philanthropy, or pursuing long-held personal goals.
2. Seek Community and Support: Joining peer groups or professional organizations can provide a sense of belonging and shared purpose. Connecting with others who have experienced business exits can offer valuable insights and camaraderie. For me, joining organizations like SCORE and the Small Business Development Center provided this community and support.
3. Invest in Professional Guidance: Hiring a financial advisor, coach, or mentor can help you navigate the complexities of wealth management, personal reinvention, and emotional adjustment.
4. Embrace Reinvention: Selling a business is not the end; it’s a new beginning. Viewing this transition as an opportunity for growth and exploration can make the process more fulfilling.
5. Avoid Overwhelming Change: While it’s tempting to make significant life changes, such as relocating or buying new properties, too much change can be destabilizing. Take time to adapt before making major decisions. In my case, I still live in the same house and drive the same old 1993 Dodge truck that I had when I started my first employer-based business in 1994.

Redeploying Wealth Post-Sale

The sale of a business often results in a significant influx of capital, requiring careful planning to manage and redeploy the proceeds effectively. For me, real estate became a natural choice. I invested in several fix and flip properties to renovate, while also developing three waterfront lots and building a spec home in Virginia.

Real estate is just one of many options for redeploying wealth after a business sale. According to experts like Darrow Wealth Management, and allBusiness, planning for taxes and diversification is critical to managing risk and ensuring financial security. Here are several strategies to consider:

1. Financial Markets and Diversification: Investing in mutual funds, municipal bonds, money market accounts, or diversified portfolios can help spread risk while generating steady returns. A financial advisor can provide insights into balancing risk tolerance with income needs, ensuring that your assets align with your long-term goals.
2. Hedging Stock-Based Transactions: If a portion of your sale involves stock in the acquiring company, hedging strategies can protect against market downturns. This can include options contracts or other financial instruments that mitigate risk.
3. Real Estate Investments: Beyond flipping and speculative building, real estate offers opportunities like rental properties or participation in real estate investment trusts (REITs). For those looking to defer taxes, a 1031 exchange may be worth exploring.
4. Charitable Giving and Philanthropy: Direct charitable donations not only provide tax benefits but also allow you to support causes close to your heart. These contributions can create a lasting legacy while reducing taxable income.
5. Estate Planning: Establishing or updating wills, trusts, and beneficiary designations ensures your wealth is distributed according to your wishes. Irrevocable trusts offer asset protection, while revocable living trusts can streamline probate procedures.
6. Retirement Planning: Maximizing IRA contributions and developing a comprehensive retirement plan can secure your financial future. Simulations, like the Monte Carlo analyses that my financial advisor at Wells Fargo did for us, can help stress-test your strategy against market fluctuations.
7. Personal Development and Lifestyle Investments: Beyond traditional financial investments, consider allocating resources to personal growth. This could include traveling, pursuing education, or investing in hobbies and passions that provide purpose and fulfillment.

Moving Forward

Selling a business is a transformative event, reshaping both your financial landscape and personal identity. For me, the journey included moments of triumph, loss, and reinvention. By carefully redeploying the proceeds and embracing new challenges, I found a way to move forward without losing the entrepreneurial spirit that defined my career.

For others facing similar transitions, the key is preparation, both emotional and financial. By diversifying investments, planning for the future, and seeking support, you can navigate this significant life event with confidence and purpose. The sale of a business is not the end of the story; it’s the beginning of a new chapter rich in possibilities.

Are you prepared to handle the emotional and financial aspects of selling your business?

Related Course: Buying or Selling a Small Business

The post Navigating the Emotional and Financial Journey of Selling a Business first appeared on SteveBizBlog.

At the end of each year, I always take some time to reflect on the past year and consider the path ahead. Over the last few weeks of 2024, I did a lot of soul-searching about the future of SteveBizBlog and its role in the evolving digital landscape.

Over the past 11 years, SteveBizBlog has grown into a trusted resource for small business owners, featuring over 1,200 posts and more than 1,000,000 words of expert advice; the equivalent of 17 full-length business books. However, with search habits shifting away from traditional keyword-based searches to conversational AI, I realized the pressing need to evolve. Faced with the “adapt or die” reality of this changing landscape, I began considering what it would take to transform my extensive knowledge base into an intelligent, interactive assistant leveraging AI.

To be more specific, as I pondered the future of years of work, I recognized that the age of stand-alone blogs as a primary resource for small business research was fading. While I have implemented sophisticated search features on SteveBizBlog to keep pace with my content repository, which has grown over the years, it still fundamentally relies on traditional keyword-based search, like the way we all interact with search engines such as Google. However, the paradigm is shifting to a conversational interface with semantic understanding.

Personally, I’ve found myself using conversational AI tools like ChatGPT for answers far more often than traditional keyword-based search—and I’m sure I’m not alone. Websites that depend on keyword-based search rely heavily on Search Engine Optimization (SEO) to improve their organic reach and compete for a spot on the highly coveted first page of the Search Engine Results Page (SERP). However, with the exponential growth in the volume of web content, chasing web traffic through SEO increasingly feels like an outdated strategy, rooted in a model that can no longer keep up with this oversaturation of available information.

Given that keyword-based search would soon no longer the answer and that contextual conversational AI was the future, I began exploring ways to make my content more appealing to Large Language Models (LLMs) like ChatGPT, hoping it might cite my pages as sources to improve SteveBizBlog’s organic reach. However, as I thought more about optimizing my content for LLMs, a significant issue based on my experience with GPTs like ChatGPT and Copilot surfaced.

When using ChatGPT during interactive research sessions with my clients, I occasionally encountered hallucinations—instances where ChatGPT fabricated facts or cited sources that didn’t exist. This highlighted a clear need for a contextual conversational AI tool specifically tailored to the challenges small business owners face, built on vetted content, such as the 1,200+ posts on SteveBizBlog.

The big question, though, was this: how could a self-funded effort like SteveBizBlog make this transition to a highly specialized and trustworthy conversational AI?

To explore ways to leverage the content I had already developed, I turned to ChatGPT. I asked it to deconstruct my business model using first principles and reimagine it within the context of the rise of conversational AI—all while adhering to a very restricted budget, as SteveBizBlog is entirely self-funded.

After an in-depth discussion, ChatGPT and I developed a framework for a potential solution. I then evaluated this framework by applying a series of assessment criteria, including its novelty, feasibility, specificity, impact, and workability. The outcome was a detailed project proposal, complete with an action plan broken down into clear implementation steps.

To quickly develop a Minimal Viable Product (MVP) to test some of my lingering assumptions, I used a WordPress plugin called WP All Export to extract the content from my blog and save it as a spreadsheet. Using this dataset, I created a custom GPT using ChatGPT to gather feedback from my peers as part of a proof of concept.

After seeing the potential and possibilities of a conversational AI bot trained exclusively on my content, I decided to take the next step. I shared my project proposal on Upwork, seeking an expert in AI chat development to help transform my MVP into a Minimum Marketable Product (MMP). I included the detailed project proposal, complete with an action plan, and invited bids to bring the project to life.

Posting this job turned out to be a truly enlightening experience. Many of the responses I received highlighted gaps in my understanding of AI solutions. As I often remind my clients, “You don’t know what you don’t know,” and this project drove that point home more than ever.

The technical details in many of the responses were beyond my expertise, prompting me to dive deeper into areas like structuring data with JSON, understanding how vector databases categorize, map, and index data for faster access, and exploring Retrieval-Augmented Generation (RAG) frameworks. But I’m getting ahead of myself.

What follows is a detailed account of how we transformed my MVP into an MMP, SteveBizBot. The mastermind behind this elegant solution was James Allen, a highly skilled professional I hired on Upwork. Remarkably, James created a proof of concept even before I brought him on board, which made his bid stand out above the rest and convinced me to do whatever it took to secure his expertise. Without his invaluable contributions, the deployment of SteveBizBot would not have been possible.

From Words to Data

The first step in the journey was to scrape the blog content from my WordPress website. Each post, including the metadata, including items such as the post’s title, except text, tags, categories, and URL, was parsed and organized into a JSON (JavaScript Object Notation) file—a structured, server-friendly format that made transferring and processing the data straightforward. With this data in hand and organized in the JSON file, the groundwork for building an AI-powered assistant was laid out.

Making Sense of It All

The next challenge was to transform this textual data into something that AI could understand. This involved converting the JSON file into vector representations using embedding models. This was done using a pre-trained OpenAI model. Think of vector embedding as assigning numerical values to words and phrases so that AI can analyze and identify various patterns. These vectors were then imported into Pinecone’s serverless vector database.

Why Pinecone? Pinecone offered us a flexible, pay-as-you-go pricing model based on usage, making it ideal for scaling as SteveBizBot gains more traction. With no upfront or fixed costs, I can keep expenses entirely variable, which is always a smart strategy when starting out, and the level of user adoption is still uncertain.

In addition to its cost efficiency, Pinecone excels at efficient indexing, creating a robust “memory” for SteveBizBot. Leveraging semantic connections in my data enables the bot to perform rapid and accurate searches, ensuring users receive relevant, contextual answers to their queries. This made Pinecone an excellent choice for building and maintaining high-performing AI-driven applications.

Building the Chatbot Brain

Since Pinecone does not provide hosting or application development, once the data was indexed and stored in Pinecone, we created an API in Pinecone so that Vercel, the tool we chose for creating the backend endpoints, could access the vector database on Pinecone.   

Finally, we wrapped it all in a chatbot framework using Python, OpenAI, and the GPT-4o-mini model. This is another way to keep the rollout costs manageable while delivering reliable performance.

Here’s how it works:

• A user submits a query.
• The query is processed through a framework called Retrieval-Augmented Generation (RAG). This ensures that the chatbot pulls its responses directly from the blog’s data, eliminating the risk of AI hallucinations, one of the goals of this project.
• The user’s query, combined with the data retrieved, is fed into ChatGPT, which crafts the response to the user using Natural Language.
• Each response to the user cites the blog post(s) used, giving users a clear source for more in-depth reading.
• Since the chat is retained in memory, the user can continue to interact with the bot by asking follow-up questions until all their immediate question are satisfied.

SteveBizBot’s Unique Value

What really sets SteveBizBot apart from just using a GPT that relies on a Large Language Model (LLM) is its source knowledge. Every piece of knowledge used to train SteveBizBot comes from my blog, which I personally researched and vetted. This guarantees users access to reliable, well-researched information, unlike generic chatbots that may pull from unvetted sources. Moreover, each response is linked to its original post, giving users a chance to dive deeper into the topics that matter to them.

Conclusion

Navigating a changing landscape requires adaptability and a willingness to embrace new approaches. Here are some key lessons you can take away from my journey:

• Regularly review your offerings: Ensure they remain relevant and aligned with the evolving needs of your audience or market.
• Leverage tools like ChatGPT: Use innovative technologies to reimagine the future and explore fresh opportunities.
• Start with a proof-of-concept MVP: Build a minimal viable product to gather early feedback and refine your ideas.
• Engage with experts: Seek out advice, remain open to constructive criticism, and conduct your own research to validate their input.
• Step outside your comfort zone: Embrace challenges to expand your knowledge and expertise.
• Document your experiences: Writing about your journey—whether in a blog post or procedure—helps solidify your learning and share insights with others.

By keeping these lessons in mind, you’ll be better equipped to adapt, innovate, and grow in a dynamic world.

What can you learn from my journey that you can apply to your business?

The post From Blog to Bot: The Journey of Building SteveBizBot first appeared on SteveBizBlog.

As a mentor to small business owners, one of the most common questions I hear is, “How can I make my website more SEO-friendly?” I’ve answered this question countless times, usually by discussing strategies like targeting keywords, improving backlinks, and optimizing metadata. For years, these practices worked well because they aligned with the algorithms used by search engines like Google. But lately, I’ve found myself revising my advice.

The rise of Generative AI tools—like OpenAI’s ChatGPT, Google’s Gemini, and Microsoft’s CoPilot—has turned the old rules on their head. Business owners who once depended on traditional SEO techniques now face a landscape where algorithms are no longer the gatekeepers. Conversations are.

Let me explain with an example.

From Search Queries to Conversations

Imagine someone is dealing with a slow-draining sink equipped with a garbage disposal. In the traditional search engine era, a user might type:

The search results would include a mix of sponsored links for local plumbers and other links the user must sift through to find a relevant answer to their question. Often, these links lead to plumbers far from the user’s location, rendering the company’s search engine optimization (SEO) efforts irrelevant to attracting this specific user.

Frustrated with having to read through perhaps a dozen landing pages, the user might refine their search to something like:

This would generate another list of ranked businesses, prioritized based on factors such as having a Google Business Profile, cumulative reviews, and strategic use of keywords like “best plumber in Monument CO.”

Now, imagine that same person using a conversational AI tool like ChatGPT. Instead of performing a simple search, conversational AI engages the user in a conversation to troubleshoot the issue. For example, the user who understands prompt engineering might start with:

The conversational AI doesn’t offer a long list of businesses for the user to comb through. Nor does it spit out just answers. Instead, it begins by asking the user relevant questions, such as:

This back-and-forth continues until the AI determines that the issue is likely a clog in the drain chamber and suggests calling a plumber familiar with your specific disposal model.

At this point, the user might ask:

Instead of providing a generic list of companies, the AI offers a tailored response, listing local plumbers along with their websites as well as a list of specific expertise in this disposal model and an explanation of why they might be a good choice.

Notice what’s happening here: interactions with conversational AI are highly contextual and personalized, focusing on direct answers rather than listing web pages. As more users shift from using traditional search engines to conversational AI tools, optimizing a landing page for keywords or owning a domain like “BestMonumentPlumber.com” may become less effective for visibility. Instead, conversational AI generates responses based on a combination of licensed data, human trainer input, and publicly available information. Unlike traditional search engines, these systems do not provide direct links to algorithm-selected landing pages or source materials from their training.

I have found that even if you request an AI chatbot to list its sources for verification purposes, the AI typically offers general guidance on where similar information might be found, such as academic journals, trusted news outlets, or official websites. While ChatGPT may sometimes provide links, these are often approximations that are not linked to the exact sources used during training. Furthermore, unlike Google, you cannot pay to be featured in AI-generated responses or to appear prominently on maps.

This shift—from static search queries to dynamic conversations—means businesses need to rethink how they create and present their content when it comes to marketing.

Why Traditional SEO is Losing Its Grip

For years, small businesses have lived and died by traditional SEO practices. Keywords, backlinks, and domain names were the currency of visibility. However, as AI chatbots gain popularity, many of these practices are losing relevance.

Exact match domain names—once the holy grail of SEO—are becoming obsolete. AI Chatbots don’t care whether your website is called “BestMonumentPlumber.com” or “SmithFamilyPlumbing.com.” They care whether you’ve provided clear, reliable, and helpful information.

And then there are the ranking hacks: hidden text, spammy backlinks, and other tricks that are used to game the system. AI chatbots don’t rely on these metrics. Instead, they focus on the quality of the information you provide.

Finally, let’s talk about the practice of keyword stuffing. In the past, businesses might cram their content with phrases like “best plumber in Monument” or include a list and full description of all the services they offer, never intended for humans to read, to rank higher on a Search Engine Results Page (SERP). But AI chatbots prioritize context over repetition. They’re looking for conversational language and meaningful answers, not robotic keyword density.

The Growing Momentum of Conversational AI

While the transition from traditional search engines to conversational AI as the primary tool for finding and interacting with businesses will not happen overnight, it is undeniably gaining momentum. As businesses increasingly explore AI-powered solutions, the shift is becoming more evident, and it’s critical for companies to start planning now.

A Personal Journey of Transformation

I know this firsthand because I have been on that journey myself. For years, I dedicated myself to writing a blog, producing content consistently, and optimizing it for SEO in the hope of driving traffic and growing my audience. I was laser-focused on keyword strategies, backlinks, and content creation, all in an attempt to outmaneuver the competitive landscape. Yet, despite my tireless efforts, traction remained elusive. No matter how much I poured into my blog, new resources like similar blogs and websites were being launched every day, increasing the competition. The sheer volume of options developing in my niche made me realize that I was stuck in an endless cycle of chasing traffic, expending tremendous energy just to maintain the status quo.

It was at this point that I began to reconsider my approach. I decided to step back and use first principles to re-examine my business. I took inventory of what I already had—my knowledge, experience, and the value I had been sharing through my blog—and questioned how I could leverage these assets in the context of a new paradigm: one dominated by conversational AI. I asked myself:

The answer, I realized, was clear: doing more of the same would not work. The traditional methods of SEO, relying on ranking higher in search engine results, were no longer enough to capture and retain customer attention in a rapidly evolving digital landscape, as few users were turning to traditional search for answers. What was required was a paradigm shift. Instead of simply chasing rankings, I needed to embrace the new rules of the game, rules shaped by conversational AI. And most businesses need to do this as well if they hope to cross the chasm from search to conversational AI.

As I began to understand the drivers of this shift, the future of my business started to come into focus. Leveraging knowledge and leaning into the AI-driven world became key to staying relevant. The new business model that emerged from my reflection and research wasn’t about fighting for visibility in a crowded search engine. It was about positioning myself as a knowledgeable and trusted authority, accessible through AI-powered tools that customers could engage with directly. This was the direction I had to move in.

Embracing Dynamic Conversations Over Static Content

For many small businesses, the transition to conversational AI solutions requires the same mindset shift I went through. The days of simply optimizing for SEO and hoping to stay ahead of the competition are numbered. In a world where AI chatbots are poised to become the main interaction point, businesses must pivot, or they will be left behind. Developing and optimizing AI-powered tools has become my top priority and deserves your attention, too.

What I realized is that the future business landscape won’t be shaped by static websites or endless blog posts created to appease SEO algorithms. Instead, it will revolve around dynamic conversations powered by AI chatbots. Businesses that harness the power of conversational AI will be able to engage customers in more meaningful ways, building stronger relationships and providing solutions at the exact moment they’re needed. Ultimately, customers will reward these businesses with their loyalty and trust.

The transition from traditional search to conversational AI requires businesses to rethink how they connect with customers. This shift isn’t just about adopting new tools; it’s about becoming more valuable to your audience and finding innovative ways to serve their needs.

Reflecting on my journey, here’s how you can begin taking actionable steps to implement and maximize the value of conversational AI for your business.

Start With What Your Customers Really Want

Where should you begin? Start by addressing your customers’ most frequently asked questions. Consider the issues they regularly bring up or the problems they’re trying to solve. If you’re unsure where to start, tools like ChatGPT can help you brainstorm and organize a comprehensive list of potential questions.

Once you’ve got your FAQs, put them front and center on your website. Not only does this make it easy for people to get answers quickly, but it also shows that you truly understand their needs. Plus, here is a bonus: FAQs are exactly the kind of content AI tools love to consume. They’re clear, direct, and packed with the kind of information AI can use to generate helpful responses.

To take it a step further, make your FAQs conversational instead of overly formal. Think of them as a friendly chat with your customers rather than a dry list of answers. This not only makes your content more engaging for visitors but also aligns with how conversational AI works, by mimicking natural, human-like interactions. It’s a small change that can make a big difference in how customers see your business.

Build Something Smarter: A Custom GPT

Now, imagine taking your FAQ game to the next level. What if you could create an AI chatbot that doesn’t just answer those questions but is trained on your content, such as your blogs, guides, and case studies, and uses that knowledge to provide detailed and accurate responses? That’s where a custom GPT comes in.

This is easier to pull off than you might think. Train your custom GPT with all the content you’ve already created, and then add it to your website. There are plenty of videos on YouTube that can walk you step by step through this process. Now, instead of just reading through FAQs and other sources, your customers can interact with an AI chatbot that gives them personalized, helpful responses. It’s like having an assistant available 24/7 to make their experience seamless.

Go Even Bigger: Share Your Expertise with the World

Once you’ve got a custom GPT working for your website, why stop there? Think about creating a portable chatbot version of it that other businesses or platforms can use. For example, if you’re an expert in a specific niche, your chatbot could live on other websites, helping their visitors while also showcasing your knowledge.

This doesn’t just expand your reach; it turns you into a go-to resource. People will start to associate your brand with the answers they need, even if they aren’t actively looking for you.

Make It Personal

One of the best parts about conversational AI is that it can make every interaction feel personal. Use it to recommend products, services, or solutions tailored to your customers’ needs. For example, if someone asks your chatbot about a specific issue, it can suggest one of your products or services that perfectly matches their situation.

This kind of personalization shows that you’re paying attention and that you really care about helping your customers. It’s not just about automating tasks; it’s about creating an experience that feels human, even when it’s powered by AI.

Keep Evolving

The world of conversational AI is constantly changing, and that’s a good thing. It means there’s always a chance to make your tools better and more useful. Keep an eye on new features, test what works best for your customers, and don’t be afraid to adjust your approach as you go.

Shifting from the search-first model, which focuses on SEO, to conversational AI might feel like a big leap, but it’s really just about focusing on what matters most: being valuable to your customers. Start by answering their questions, build tools that make their lives easier, and keep improving along the way. With a little effort and the right mindset, you’ll be ready to thrive in a world that’s all about connection and conversation.

How is your business marketing evolving in a world dominated by conversational AI?

The post How Conversational AI Is Changing the Rules of SEO first appeared on SteveBizBlog.

When I was first starting out in business, I dove headfirst into what I now know as category creation. My first foray into business was with Invisible Fencing as a franchise, a product that, at the time, was a completely new concept. Unlike traditional fences, Invisible Fencing uses technology to keep dogs safely contained without a physical barrier. The idea was innovative and exciting, and I thought it would make me rich, but as I quickly learned, breaking into an entirely new market category comes with unique challenges.

Looking back, my experience with Invisible Fencing was a crash course in category creation. It taught me hard but valuable lessons that I still carry with me today that I share with clients. Let me share those insights, along with what I’ve learned since, so you can decide if creating a new category is right for you.

What Is Category Creation?

Category creation means launching something so unique it doesn’t fit neatly into an existing market. Instead of competing with other products or services, you position yours as the first and best solution to a problem that most people didn’t even know they had. This was precisely the case with Invisible Fencing and that is why I was so excited about becoming one of their first dealers.

When we introduced the product, potential customers were unfamiliar with the idea of an “invisible” way to keep pets safe. They were used to traditional wood stockade or chain-link fences. To them, the concept of training a dog with a boundary they couldn’t see seemed too futuristic—if not downright impossible or a gimmick. The task of educating and persuading the southern Colorado market fell squarely on our shoulders.

Why It’s Tempting to Create a New Category

It’s easy to see why category creation is so alluring. If you succeed, you don’t just become a player in the market—you become the market. Think about how Kleenex is synonymous with tissues or how Uber is the face of ridesharing. With Invisible Fencing, we weren’t just selling a product; we were introducing a whole new way of thinking about pet safety. The potential for market dominance was a huge motivator for me at the time.

But the reality is that the path to success is far from straightforward. For every Tesla or Airbnb, there are countless companies that fail to gain traction. I’ve been on both sides of that equation, and I can tell you firsthand that category creation is not for the faint of heart.

The Challenges I Faced with Invisible Fencing

1. Educating the Market

One of the first and biggest challenges I encountered was educating potential customers. People had never seen anything like Invisible Fencing before, so their first reaction was skepticism. They didn’t understand how it worked, whether it was safe for their pets, or if it would even be effective. I remember talking to an insurance company that denied me a general liability insurance policy, saying that they thought that it had the potential to electrocute the dog.

I spent countless hours demonstrating the product at trade shows and during human interest news stories, explaining the technology, and, most importantly, convincing people that it wasn’t some sort of science fiction. This was a slow, uphill battle. Even today, educating the market remains one of the steepest challenges for anyone trying to create a new category.

2. Changing Consumer Behavior

Convincing people to adopt a new product is one thing; getting them to change their habits is another. For customers, switching to Invisible Fencing meant learning how to train their dogs in a new way, which was not complicated and only took about an hour over the course of several days. Many prospects were hesitant, preferring the familiarity of traditional fences.

This taught me a critical lesson: people are creatures of habit. Even when presented with a better solution, they often resist change. Successful category creation requires not just selling a product but also selling a new behavior.

3. High Costs

Educating the market and changing behaviors don’t come cheap—trust me. When I started my Invisible Fencing business, I quickly realized how much effort (and money) it would take to make people aware of our innovative product. Overall, my margins were quite small since most of it went into advertising because Invisible Fencing was a completely new category. I had to spend heavily on advertising just to get potential customers to understand what it was and why they needed it. This wasn’t a one-and-done effort either; it required consistent repetition to make our message stick in people’s minds.

This ties directly to the Rule of 7, a marketing principle that states a prospect needs to see or hear your message at least seven times before they’ll take action. With Invisible Fencing, we had to keep hammering home the benefits of the product—through direct mail, local newspaper ads, human interest news segments, and live demonstrations—so that potential customers could overcome their skepticism and finally take the leap.

Advertising, partnerships, and sometimes lobbying (if your category disrupts regulated industries) can quickly drain your resources. According to a study by CB Insights, one of the top reasons startups fail is running out of cash, and businesses attempting category creation are particularly vulnerable to this pitfall. Creating a new market is an expensive endeavor, and without a solid financial plan, even the most innovative ideas can fall flat.

4. Resistance from Incumbents

Whenever you create a new category, you’re bound to ruffle feathers. With Invisible Fencing, we faced resistance from traditional fence manufacturers, veterinarians, and even some pet trainers who were skeptical of our product and methods. I quickly learned that when you’re disrupting an established market, pushback is inevitable.

For modern examples, think of how ridesharing apps like Uber faced opposition from taxi companies or how Tesla disrupted the automotive industry and the oil industry. If you’re considering category creation, prepare to fight for your place in the market.

5. Uncertain Demand

When we first started selling Invisible Fencing, the big question was: would people even buy it? At the time, there was no proven market for the product. We had to take a leap of faith, investing in marketing and customer education without any guarantee of success.

This is a common risk in category creation. What if no one wants what you’re offering? Even today, businesses that pioneer new categories often struggle with this uncertainty.

Lessons from Invisible Fencing and Other Category Creators

Despite the challenges, some businesses manage to navigate the rocky terrain of category creation successfully. Reflecting on my experience with Invisible Fencing, here are some key lessons that apply to anyone considering this path:

1. Solve a Real Problem

One reason Invisible Fencing eventually gained traction is that it solved a real, pressing problem: how to keep pets safely contained without the cost, aesthetic, and upkeep downsides of a physical fence.

The same holds true for successful category creators like Uber, which addressed the inefficiencies of taxis, or Airbnb, which offered a cheaper, more personalized alternative to hotels. If your product doesn’t address a genuine need, it will struggle to gain traction.

2. Start Small, Then Scale

When Invisible Fencing was first launched, we focused on a niche market: dog owners who were early adopters and open to trying new solutions. This approach allowed us to build a loyal customer base and refine our messaging before encountering competition before our patent expired and we could scale up.

Tesla followed a similar strategy, starting with high-end sports cars before moving into the mass market. If you’re creating a new category, it’s often better to focus on a niche market first and expand later.

3. Build Trust Over Time

Trust is critical when you’re introducing something new. With Invisible Fencing, customer testimonials and word-of-mouth recommendations played a huge role in overcoming skepticism.

Building trust takes time, but it’s essential for category creation. Testimonials, reviews, and endorsements from recognized experts, such as veterinarians in our case, can go a long way in convincing hesitant customers.

Competing vs. Creating: Finding the Right Path

While the rewards of category creation can be immense, my experience with Invisible Fencing taught me that it’s not the right path for everyone. Competing in an existing category—what’s known as a “red ocean” strategy—can be less risky and more predictable.

For many businesses, differentiation within an existing category, known as a “blue ocean” strategy, is a more sustainable approach. Can you offer better customer service? Lower prices? A more convenient experience? Sometimes, improving on what already exists is more effective than creating something entirely new.

The Role of Timing in Category Creation

Timing is everything. Invisible Fencing succeeded in part because the market was ready for a solution like ours. The technology was advanced enough to work effectively, and pet owners were becoming more open to innovative solutions.

Timing has been critical for other category creators, too. Electric vehicles existed long before Tesla, but it wasn’t until advancements in battery technology, growing environmental awareness, and favorable regulations aligned that Tesla could thrive. According to the Harvard Business Review, category creators often benefit from what’s called “category maturity” when consumer awareness and demand hit critical mass.

Is Category Creation Right for You?

Reflecting on my journey with Invisible Fencing, I can say that category creation is one of the most challenging yet rewarding paths in business. It requires resilience, deep pockets, and a willingness to face skepticism and resistance head-on. But it’s not for everyone. If you’re not ready for the uphill battle, there’s no shame in competing within an existing category with a slightly different value proposition.

Ultimately, whether you choose to create or compete, the key is understanding your market, your customers, and your unique value proposition. My experience with Invisible Fencing taught me that success doesn’t come easy, but with the right strategy and perseverance, it’s possible to turn even the most ambitious ideas into reality.

Have you ever considered creating a new category?

The post The Challenges of Creating a New Category: Lessons from My Journey with Invisible Fencing first appeared on SteveBizBlog.

Over the past two decades of mentoring entrepreneurs, I’ve frequently encountered clients who are excited about new technologies and eager to launch products or services to capitalize on them. Unfortunately, many of these entrepreneurs lack real expertise in implementing the technology and are driven primarily by a passion to pursue it in hopes of striking it rich.

This fascination with the “next big thing” is understandable as new innovations and technologies often promise high returns and early mover advantages. However, seasoned investors like Warren Buffett and Charlie Munger caution against jumping into ventures simply because the technology is new or popular. They emphasize the concept of the “circle of competence,” advising that one should only invest in areas they thoroughly understand. The idea of sticking to one’s circle of competence isn’t about limiting growth but about ensuring decisions are informed by genuine knowledge, not just surface-level enthusiasm.

The pursuit of new technology in business can be particularly challenging, as seen in frameworks like the Gartner Hype Cycle, and have psychological effects like the Dunning-Kruger effect. For small business owners, this combination of inflated expectations and misplaced confidence can lead to financial loss and burnout.

The Circle of Competence: Understanding Business Fundamentals

Buffett and Munger’s circle of competence concept advises investors and entrepreneurs alike to stay within areas where they have in-depth knowledge and can make sound judgments. While this approach may seem restrictive, its purpose is to protect people from the risks of venturing into uncharted waters. This concept is especially relevant in technology-driven businesses, where it’s easy to get swept away by the promise of revolutionary change without fully grasping the economic mechanics at play.

Consider the following example, loosely based on one of my client’s experiences.

A tech-savvy individual with a passion for drones decided to start a business specializing in aerial photography for the real estate industry and property inspections. They were skilled at flying drones and capturing stunning images and assumed their technical abilities would translate into a successful venture.

However, they overlooked the critical aspects of running a business with the technology. They failed to research the competitive landscape and underestimated how many real estate photographers already offered drone services. Additionally, they didn’t focus on building relationships with real estate agents and home inspectors or understanding their specific needs, such as quick turnaround times or specific angles that highlight specific features.

Pricing was another stumbling block. They set their rates too high compared to established competitors, making it difficult to attract new clients. They also neglected to market their services effectively, assuming that their impressive portfolio alone would draw in customers.

Despite having strong technical skills and high-quality equipment, the lack of a targeted business strategy, customer focus, and effective marketing led to poor sales.

To ground oneself in the business fundamentals, it’s critical to look beyond the technology itself and focus on questions like:

• Who are the customers, and what is their willingness to pay?
• What are the fixed and variable costs of operating this business?
• How does cash flow work in this model?
• What are the capital requirements, and how will they scale?

Knowing how technology works does not automatically translate to knowing how to run a business centered around it. When entrepreneurs jump in without understanding cost structures, market demand, or the competitive landscape, they risk discovering these gaps only after making costly investments. 

Whenever I encounter an entrepreneur who’s looking to capitalize on a new technology and who, after talking to them, appears to me to be outside their circle of competence, I share with them lessons from the Gartner Hyper Cycle and the Dunning-Kruger effect.

The Gartner Hype Cycle: Separating the Hype from Reality

The Gartner Hype Cycle is a tool that tracks the lifecycle of new technologies, showing how initial excitement eventually gives way to more realistic expectations. It comprises five stages:

1. Technology/Innovation Trigger
2. Peak of Inflated Expectations
3. Trough of Disillusionment
4. Slope of Enlightenment
5. Plateau of Productivity

New technology often starts with intense enthusiasm and media coverage, reaching a “Peak of Inflated Expectations.” This phase is particularly dangerous for new business owners who equate potential with profitability. Many entrepreneurs jump in at this peak, assuming that the hype will carry their business forward. However, once technology enters the “Trough of Disillusionment,” they realize that the reality of building a business is far more challenging than they anticipated. Only those who survive this dip, developing a clear understanding of sustainable practices, reach the “Plateau of Productivity,” where real value emerges.

Instead of being lured in by the hype, entrepreneurs should critically evaluate where a technology currently sits in the cycle. If it’s still at the peak of inflated expectations, recognize that the market may be oversaturated with competition or driven by unrealistic demands. Waiting until a technology has matured can mean better market insights, lower startup costs, and a more accurate sense of the long-term potential.

The Dunning-Kruger Effect: Recognizing When You Don’t Know Enough

A vital aspect of sticking within your circle of competence is acknowledging the Dunning-Kruger effect, which is a cognitive bias where people overestimate their competence in areas they are relatively inexperienced. Often, individuals who are new to a field feel overly confident because they haven’t yet encountered the full complexity of what they don’t know.

When someone new to technology sees others thriving in a particular industry, they often assume that understanding the technology alone will suffice. However, technology-focused businesses require expertise in areas beyond the tech, like supply chain management, regulatory compliance, and customer acquisition. It’s essential to take a step back and recognize the limits of your knowledge, seeking mentorship or expert guidance before committing resources.

Real-Life Examples: The Pitfalls of Ignoring Competence Boundaries

The tech industry is full of examples of entrepreneurs who ventured into technology-based businesses without fully understanding the economics:

• Blockchain Startups in the Cryptocurrency Boom: During the cryptocurrency surge, many entrepreneurs launched blockchain-based startups, believing they could ride the wave of innovation. However, without a grasp of regulatory requirements, cybersecurity, and customer demand, many folded during the subsequent downturn.
• 3D Printing Craze: When 3D printing emerged, many businesses sprang up, but few understood the high costs of materials, maintenance, or the limited market demand for custom 3D-printed goods. While the technology was groundbreaking, most businesses underestimated the learning curve and market readiness.
• AI-Powered Chatbots: An AI enthusiast with a strong technical background launched a business offering AI-powered chatbots for small businesses. While technically sophisticated, they failed to identify the actual needs of their target audience, struggled with pricing, and lacked a clear marketing strategy. The product was too complex for their intended customers, leading to poor adoption and eventual business failure.
• Smart Home Device Installations: A tech-savvy entrepreneur started a business installing and configuring smart home devices, such as smart thermostats, lighting, and security systems. While they understood the technology, they overlooked the importance of customer education and ongoing support. Many homeowners found the services confusing or unnecessary, and the entrepreneur struggled to build trust with non-tech-savvy clients. Additionally, competition from larger retailers offering similar services at lower prices made it difficult to sustain the business, ultimately leading to its closure.

These cases highlight that just because a technology is transformative, it doesn’t mean that it has the immediate infrastructure, customer base, or revenue potential to support a business.

Building a Path to Sustainable Success

If you’re considering a technology-driven business, here are some actionable steps to ensure you’re ready for the challenge:

• Validate the Market: Before investing in any equipment, software, or space, verify that there’s genuine demand. Conduct surveys, talk to potential customers, and test prototypes. Avoid heavy investment until you’re confident of market viability.
• Build a Knowledge Network: Surround yourself with people who have relevant experience. Partnering with advisors, consultants, and mentors who can help you navigate the intricacies of a new industry can drastically reduce the learning curve.
• Take Small Steps: Start with a pilot or small-scale project to understand the costs and challenges. This “learning by doing” approach allows you to gain valuable insights before committing significant resources.
• Plan for the Worst-Case Scenario: Even if you’re confident about a technology’s future, always create a contingency plan. This might mean setting aside a financial buffer or developing an exit strategy to minimize losses if things don’t go as planned.

In the rush to capitalize on emerging trends, it’s tempting to think that knowing the technology is enough. However, the true mark of a successful business is not merely innovation; it’s mastery of the entire operation, from customer acquisition to cash flow management and beyond. Your “circle of competence” is your safe zone, where you can make decisions based on expertise rather than excitement.

As Buffett and Munger would advise, make decisions based on a full understanding of the business landscape, not just the appeal of the new. Expanding your circle of competence may be a gradual process, but it’s the path to sustainable, profitable growth.

Is your business concept within your circle of competence?

The post How to Avoid Failure by Sticking to Your Circle of Competence first appeared on SteveBizBlog.

Sales processes vary significantly between Business-to-Consumer (B2C) and Business-to-Business (B2B) transactions. While B2C sales are often simple, involving a single decision-maker, B2B sales are more complex, especially when dealing with larger companies. This complexity arises because B2B transactions typically involve multiple stakeholders, each with distinct roles, priorities, and decision-making criteria. To successfully close a complex B2B sale, sales professionals must understand and address these dynamics effectively.

Simple Sales in B2C Transactions

In B2C transactions, the buyer, user, and payer are usually the same individual. This unity simplifies the sales process, as the salesperson only needs to demonstrate the product or service’s value to one person. For example, when a consumer buys a smartphone, they are the individual evaluating the features, making the purchase decision, and ultimately paying for and using the device. The B2C sales process hinges on understanding the consumer’s needs and showcasing how the product fulfills them.

B2C sales focus on emotional appeal, convenience, and perceived value. Price sensitivity, brand reputation, and immediate benefits often weigh heavily in the decision. Because of this simplicity, the sales cycle is shorter, and the decision-making process is relatively straightforward.

The Dynamics of Complex Sales in B2B Transactions

In contrast, B2B sales involve multiple stakeholders, each with distinct responsibilities and objectives. These sales are not just about convincing one person but aligning the interests of an entire decision-making unit. This is especially true for large organizations where the stakes are higher, the budgets are significant, and the potential risks of a poor decision are magnified.

Related post: Your Customer is Afraid You’ll Cost Him His Job

To understand complex sales, it helps to break down the typical roles involved:

Money Guy (Payer): Often represented by the manager with budget authority, the money guy’s primary concern is financial. They evaluate the proposed solution’s Return on Investment (ROI), profitability, and cost-effectiveness. The money guy’s questions might include:

• How will this purchase improve the company’s bottom line?
• What are the potential cost savings or revenue increases associated with this solution?
• Are there risks of overspending or under-delivering?

A successful pitch to the money guy requires quantifiable metrics, such as financial projections, case studies, and cost-benefit analyses.

Purchasing Department (Buyer): Typically, this role is fulfilled by a procurement officer or purchasing manager. The purchasing department’s responsibility is to act as a gatekeeper, ensuring that all company policies and procedures are followed. Their concerns are often administrative and logistical:

• Does the vendor have the necessary credentials, insurance, or certifications?
• Are there any red flags in the vendor’s track record or references?
• Does the proposal meet compliance requirements?

The purchasing department’s role is crucial because it controls access to the organization. A persuasive argument to the purchasing department focuses on transparency, reliability, and adherence to procurement guidelines.

Tech Guy (User): This is the person or team that will use or need the product or service in their day-to-day operations. Often, this role is filled by technical experts, engineers, or end-users who directly interact with the solution. Their primary concern is functionality:

• Does the product solve their specific problem?
• Is it user-friendly and compatible with existing systems?
• Will it enhance efficiency or productivity?

The tech guy is often the initial advocate for your solution. Winning their support requires a deep understanding of their pain points and demonstrating how your product or service directly addresses their challenges.

Tailoring Your Approach to Complex Sales

Given the diverse priorities of the money guy, purchasing department, and tech guy, a one-size-fits-all sales pitch is ineffective. Instead, a multi-faceted approach is necessary, with tailored presentations and messaging that speak to the unique concerns of each stakeholder.

Crafting a Financial Case for the Money Guy:

• Emphasize ROI with concrete numbers. For example, “Our solution will reduce your operational costs by 15% annually, saving approximately $50,000 annually.”
• Use case studies and testimonials from similar businesses to build credibility.
• Address risk mitigation by highlighting warranties, guarantees, or proven success rates.

Building Trust with the Purchasing Department:

• Provide thorough documentation, including certifications, insurance coverage, and a history of successful projects.
• Be transparent about pricing, timelines, and deliverables.
• Offer references from past clients to validate your reliability.

Demonstrating Value to the Tech Guy:

• Use technical demonstrations, such as live product walkthroughs or prototypes, to showcase functionality.
• Tailor solutions to their specific needs. For example, if you’re selling software, explain how it integrates seamlessly with their existing systems.
• Provide training resources or ongoing support to ensure a smooth implementation.

Related Post: How to Overcome Client Skepticism

Managing Long Sales Cycles

Complex sales typically involve longer sales cycles due to the number of decision-makers and the higher stakes involved. It’s common for the sales process to stretch over weeks or months as stakeholders review proposals, compare alternatives, and conduct internal discussions.

To navigate this extended timeline:

• Stay engaged: Regular follow-ups demonstrate your commitment and keep your solution top of mind.
• Leverage champions: Identify a key advocate within the organization, such as the tech guy, who can push your proposal forward internally.
• Be patient but persistent: Respect the organization’s decision-making process while gently nudging them toward a conclusion.

The Importance of Relationship Building

In complex sales, relationships are as important as the solution itself. Building trust with each stakeholder can significantly improve your chances of success. To do this:

• Invest time in understanding their needs: Conduct thorough research before your pitch.
• Maintain consistent communication: Keep stakeholders informed throughout the sales process.
• Show empathy and flexibility: Understand their challenges and adapt your proposal to address them.

Conclusion: Navigating the Complexity

B2B sales are inherently complex, but understanding the distinct roles of the money guy, purchasing department, and tech guy provides a roadmap for navigating these challenges. By crafting tailored presentations and messaging, managing long sales cycles effectively, and building strong relationships, you can successfully address the needs of all stakeholders and close deals with confidence.

Do your complex sales presentations serve the informational needs of all parties?

The post How to Handle Complex Sales for B2B Businesses first appeared on SteveBizBlog.

My first employer-based business was a documentation and training company. My team crafted user manuals and service guides and developed training courses for a variety of customers. Some of our clients were a dream to work with; they provided clear requirements, paid on time, and kept coming back for more projects. Other clients seem to treat my team members as their personal assistants, frequently demanding revisions, stretching deadlines, changing the scope of work, and constantly complaining about our rates, saying they were too high, hoping we would reduce them.

This example illustrates a universal truth for businesses: not all customers are created equal. While some helped our business thrive, others quietly drained our resources. This is why Customer Profitability Analysis (CPA) is crucial. CPA helped us identify which customers were profitable (“ideal”), which were not profitable but helped cover most expenses (“laggards”), and which were actively harmful (“losers”).

Let’s explore how CPA works and how a company like mine could use it to transform its customer base and the bottom line.

What Is Customer Profitability Analysis?

Customer Profitability Analysis is the practice of breaking down all revenues and costs associated with individual customers to determine their overall profitability. It’s not just about how much money a customer brings into the business as revenue but about understanding the total cost of serving them.

Costs fall into two main categories:

• Direct Costs: Expenses tied directly to the work you perform, such as salaries and benefits.
• Indirect Costs: Overhead and back-office costs such as administrative time, rent/utilities, insurance, and other costs necessary to operate the business.

After identifying direct and indirect costs, the next step is to allocate these indirect costs to specific customers using Activity-Based Costing (ABC). Traditional costing methods often distribute overhead expenses uniformly across all customers, regardless of their actual consumption of resources. This approach can lead to inaccuracies, as it fails to account for the varying demands each customer places on your business. ABC resolves this by tracing indirect costs back to the activities that drive them, and then assigning these costs proportionally to the customers who consume these activities.

For example, consider a technical documentation company where project requirements vary significantly. Some projects require specialized software with associated licensing fees, while others do not. Other projects involve staff working on-site at the client’s location, thereby not incurring the costs associated with office space and infrastructure, such as utilities and Internet connectivity. Using Activity-Based Costing (ABC), the company would identify key activities for each project. Each activity would be assigned a cost driver; for example, the allocation of software licenses or hours spent on-site vs off-site. By linking costs to specific activities and the customers responsible for them, ABC provides a clearer understanding of how indirect costs are incurred and distributed, enabling a more accurate analysis of profitability.

By subtracting total costs (both direct and indirect) from revenues generated by a customer, you can determine their actual profitability. Based on this analysis, customers can be categorized into three distinct groups:

1. Ideal Customers: These customers are highly profitable, easy to work with, and dependable. They are perfectly aligned with your business goals and should be prioritized and nurtured to sustain and grow their value to the company.
2. Laggard Customers: While these customers generate enough revenue to cover their direct costs and most of their indirect costs, they do not always fully cover their share of indirect costs. Despite this, losing their revenue could hurt the company’s overall profitability, as fixed indirect costs would need to be redistributed among your ideal customers, lowering their profitability. Laggard customers represent an opportunity to refine processes or strategies to improve their profitability.
3. Loser Customers: These are unprofitable customers who often fail to even cover their direct costs. Additionally, they place a disproportionate burden on indirect costs by consuming excessive resources. These customers drain profitability and should be fired, so they become the competition’s problem.

When Interleaf, the public company that acquired my documentation and training business along with several other similar businesses, hired me as Vice President of Operations, they were themselves acquired eighteen months later. Interleaf’s service division – which I managed – was slated for closure. I was tasked with finding a new home for our documentation and training clients. Using CPA, my team and I identified our ideal customers. One of my former partners and I created a new company specifically to continue to serve these ideal customers. Additionally, we selected a few laggard customers that we believed could be transformed into ideal clients with some effort. I offered the remaining customers, categorized as laggards or losers, to our competitors.

Many of these competitors, unaware of the principles of CPA, eagerly accepted these unprofitable customers, focusing only on their revenue potential. Over time, the strain of serving these laggard and loser customers took its toll on many businesses, leading some to even close. Their closure meant shedding their formerly ideal customers as well. We were ready and prepared to step in and absorb our competitors’ ideal clients, which strengthened our position in the market. By understanding and applying CPA and ABC, we not only avoided the pitfalls that plagued our competitors, but it also allowed us to remain profitable and position ourselves for sustainable growth. 

A Tale of Three Customers

Let’s look at how a company can apply CPA to evaluate three different clients. I’ll use the example of a documentation and training company like mine.

Ideal Customer: Innovative Tech Solutions

Innovative Tech Solutions is a SaaS company that consistently contracts the documentation firm to create user-friendly product manuals and training videos. They provide clear project requirements upfront, are responsive during the feedback process, and always pay invoices within 30 days, as agreed.

Revenue is strong, costs are minimal due to their efficiency, and the relationship has led to referrals of similar clients. This client is the textbook definition of an “Ideal” customer.

Laggard Customer: Regional Manufacturing Inc.

Regional Manufacturing Inc. contracts for employee training materials once a quarter. While they provide steady business, their projects often come with unclear expectations, requiring additional communication and rework. Payments occasionally occur after the agreed Net 30 payment term, and the team spends more time than they’d like resolving these issues.

Projects from Regional Manufacturing Inc. do not always return a profit to the company. That said, they consistently cover all their direct expenses and, in most cases, their share of indirect costs. However, there are times when they add to the company’s indirect costs, making their overall contribution less consistent. Despite this, customers like Regional Manufacturing Inc. are valuable during periods when revenue from other sources falls short, as their contributions help cover fixed indirect costs. With some targeted effort, this customer has the potential to become more profitable and a stronger long-term asset to the business.

Loser Customer: Retail Giant Co.

Retail Giant Co., despite its big-name appeal, is the company’s most challenging client. They insist on rock-bottom pricing, demand unlimited revisions, and regularly push back deadlines. Their payment terms are Net 30, but the actual payments often take 60 days or more, meaning the company often waits two to three months to be compensated for work already performed and delivered.

After running CPA, the company discovered that Retail Giant Co. accounted for 40% of their workload, but only contributed 32% of the company’s revenue, creating a significant drain on resources and contributing no profit to the bottom line. Moreover, the client frequently refused to pay for hours worked when deadlines – often missed due to their own delays – were not met. Additionally, their payment terms were so extended that the company sometimes had to factor their invoices to maintain sufficient cash flow, incurring extra costs that further eroded margins. In some cases, their projects didn’t even cover direct labor costs, let alone contribute to their share of indirect costs. This demanding client also created substantial stress for the team, leading to burnout and turnover, further compounding the negative impact on the business.

The CPA Process in Action

After the company conducted a CPA analysis to get a clear picture of profitability, here’s what they discovered:

Firing the Loser Customers

As the CPA shows, Retail Giant Co. was clearly a loser customer. While it’s never easy to part ways with a client that accounts for nearly one-third of the company’s revenue – especially a high-profile one at that – it became evident that letting them go was the right choice. To outsiders, the sharp drop in revenue might create the impression that the business was in trouble. However, in reality, the reduction in revenue was a calculated move that significantly boosted profitability. By eliminating this unprofitable client, the company doubled its profits for the owners, proving that prioritizing profit contribution over total revenue is the key to long-term success.

Turning Laggards into Ideal Customers

The company recognized the potential of Regional Manufacturing Inc. and took deliberate steps to improve the relationship by employing a 13-step onboarding process. They began by setting clear expectations and introducing a detailed project scope template to minimize miscommunication and ensure alignment on deliverables. To streamline processes and reduce inefficiencies, they assigned a dedicated account manager to oversee the client’s projects and handle communication. Additionally, they offered a small discount as an incentive for early payments, which successfully encouraged Regional Manufacturing Inc. to pay invoices before the Net 30 deadline. Within six months, these efforts transformed Regional Manufacturing Inc. into a more reliable client, increasing profitability and alleviating stress for the team.

Cultivating Ideal Customers

The company leveraged strategic account management principles to retain and grow relationships with its ideal customers, such as Innovative Tech Solutions. Unlike customer service, which is primarily reactive and focused on preventing client attrition, strategic account management takes a proactive and offensive approach. Its goal is not merely to address client needs but to actively grow sales within an account while uncovering new business opportunities.

Using these principles, the company went beyond exceptional customer service. While they consistently delivered projects ahead of deadlines and included thoughtful extras like executive-level support and complimentary project summaries for larger initiatives, their approach didn’t stop there. They scheduled quarterly check-ins, not just to resolve issues or ensure satisfaction but to discuss evolving client needs and identify growth opportunities. Recognizing the potential of client advocacy, they also created an active referral program, securing two new clients with profiles similar to Innovative Tech Solutions. This proactive, growth-oriented strategy helped reinforce customer loyalty, expand relationships, and generate new business, demonstrating the distinct advantages of strategic account management over traditional customer service.

Conclusion: The Power of Customer Profitability Analysis

Customer Profitability Analysis isn’t just a financial exercise – it’s a strategy for reclaiming control of your business. By understanding the true cost of serving each customer, you can make informed decisions about where to focus your time, energy, and resources.

Whether you’re running a technical documentation company, a coffee shop, or a software firm, the principles remain the same. Identify your ideal customers, nurture them, and find ways to turn laggards into ideal customers. And when necessary, don’t hesitate to let go of loser customers who hold you back.

The rewards – a more profitable business, a happier team, and better clients – are well worth the effort.

When was the last time you reviewed your customer list and conducted a CPA analysis to discover your ideal, laggard, and loser customers?

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To all our readers, we wish you a Happy New Year. We are enjoying it with your loved ones. We will see you next week.

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To all our readers, we wish you a Merry Christmas. May you enjoy it with your loved ones. We are. See you in the New Year.

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Many years ago, I attended a workshop hosted by IBM that fundamentally reshaped how I viewed costs and profitability in business. The workshop introduced me to two concepts that were game changers: Activity-Based Costing (ABC) and Customer Profitability Analysis (CPA). These tools, while powerful individually, become transformative when combined. ABC opened my eyes to the true drivers of costs within my organization, and CPA helped connect these insights to customer relationships and decision-making.

At its core, ABC isn’t just a method for allocating costs; it’s a lens through which you can see the real mechanics of your business. I came to realize that traditional costing methods could obscure valuable insights, lumping indirect costs into broad categories that fail to tell the whole story. ABC cuts through that fog, illuminating the specific activities that drive costs and enabling precise, actionable insights.

When I attended the IBM workshop, I was managing the documentation and training division within Interleaf, a service-based enterprise. Interleaf had recently acquired my documentation and training company along with two other documentation companies, and our main deliverables included user manuals, service guides, and training courses for Interleaf’s customers. Like many service businesses, I struggled to identify which customers were genuinely profitable.

The Challenge of Costing in a Service Business

Service businesses often struggle to allocate costs accurately. Unlike manufacturing, where you can point to raw materials or machine hours, service costs are tied to less tangible elements, such as people’s time, varied skill sets, and different support functions. In my documentation and training division, I thought I understood my costs. I knew how much I paid my team, how much time we spent on client projects, and what it cost to run the office. But I couldn’t shake the feeling that some clients and projects were far more profitable than others – and that I wasn’t capturing this difference in my pricing.

At the workshop, the instructor posed a simple question to me, “Do you really know what it costs to deliver your services?” At the time, I thought I did. Like many in the class, I assumed that as long as revenue exceeded direct costs, the rest was just a matter of covering overhead. But as the session unfolded, I realized how wrong I was. My assumptions about profitability were based on broad averages that hid the nuances of my operation. This is where ABC came in.

Understanding Activity-Based Costing

ABC is more than just a costing method; it’s a way to see your business operations with precision and clarity. Instead of lumping overhead costs into broad categories and allocating them across all billable hours, ABC identifies specific activities that drive costs and assigns those costs based on actual consumption.

For my business, breaking down our operations into discrete activities was essential, particularly because the costs varied significantly depending on the type of customer and deliverable. Each deliverable had unique cost drivers, and identifying these activities allowed me to uncover the real dynamics of resource usage.

In the following example, we will be examining how to allocate costs for a technical writer using Activity-Based Costing (ABC). While the focus here is on technical writer hours, the same principles apply to other roles in a documentation and training business, such as editors, graphic designers, instructional designers, course developers, and programmers. Each role would have its own direct costs, general overhead allocations, and project-specific adjustments.

1. Establishing the Direct Cost for Technical Writer

The first step was to identify the baseline rate for the function.

Direct Cost

The direct cost of a technical writer includes:

• Average base salary: $75,000/year
• Payroll taxes: $6,000/year
• Fringe benefits: $20,000/year

Total annual compensation: $101,000/year
Hourly direct cost: $101,000 ÷ 2,080 hours = $48.56/hour, rounded to $50/hour.

G&A Allocation

General and Administrative (G&A) costs include:

• Sales and Marketing: $100,000/year
• Administrative Support and Management Salaries: $150,000/year

Total G&A costs: $250,000/year
Total billable hours (all roles): 45,000 hours

G&A overhead per hour: $250,000 ÷ 45,000 = $5.56/hour.

Baseline Rate

Adding G&A to the direct cost:
$50/hour (direct cost) + $5.56/hour (G&A overhead) = $55.56/hour, rounded to $56/hour.

This $56/hour is the baseline rate applied to all technical writer hours before office or project-specific allocations are added. The baseline rate is a ‘peanut butter’ allocation that is spread evenly across all billable hours for writers. Be mindful that this would be developed for all roles, such as editors, graphic designers, instructional designers, course developers, and programmers.

2. Allocating Office Overhead Costs

Office-specific costs are allocated to all hours worked on site, as off-site projects do not consume office resources.

Office Costs

• Annual office rent and utilities: $100,000
• Annual computer, Internet, and office equipment costs: $50,000
• Total office-specific costs: $150,000
• Total on-site hours: 41,000 hours (45,000 total billable hours – 4,000 hours for two writers working off-site at the client’s offices)

Office overhead per on-site hour:
$150,000 ÷ 41,000 = $3.66/hour, rounded to $4.00/hour

• Off-site Projects (e.g., Project A):
  $56/hour (baseline), as no office overhead is applied = $56/hour
• On-site Projects (e.g., Project B and others):
  $56/hour (baseline) + $4.00/hour (office overhead) = $60/hour.

3. Allocating Software Costs (Usage-Based Allocation)

Certain tools, like version control systems, are used exclusively by specific projects, and their allocation varies based on the project. For Project A, the customer required that the software cost be invoiced separately as a monthly line item, ensuring clear visibility. In contrast, for Project B, the software cost is integrated into the hourly rate, streamlining billing while still reflecting usage.

Software Costs

• Annual software license cost: $10,000
• Project A usage: 4,000 hours
• Project B usage: 2,000 hours
• Total software usage hours: 6,000 hours

Monthly Invoice for Project A

• Total software cost for Project A:
  $10,000 × (4,000 ÷ 6,000) = $6,667.
• Monthly invoice amount for Project A:
  $6,667 ÷ 12 = $556/month.

Per Hour Allocation for Project B

• Software cost per hour for Project B:
  $10,000 × (2,000 ÷ 6,000) ÷ 2,000 = $1.67/hour, rounded to $2/hour

Project-Specific Fully Burdened Rates

• Project A (Off-site):
  $56/hour (baseline rate)
  Software invoiced separately at $556/month.
• Project B (On-site):
  $60/hour (onsite rate) + $2.00/hour (software) = $62/hour.
• Other Projects that do not use the version control software (On-site):
  $60/hour (on-site rate).

Summary of Fully Burdened Rates

ABC allowed me to assign costs to these specific activities based on their consumption of resources, such as staff time, software, or physical infrastructure.

By breaking down operations in this way, ABC not only revealed the true cost of each deliverable but also highlighted why these costs existed. This clarity empowered me to make more informed decisions and better align pricing with the value delivered to clients.

How ABC Works with Customer Profitability Analysis (CPA)

The workshop also introduced me to Customer Profitability Analysis (CPA), which builds on ABC’s foundation. CPA examines the profitability of individual customers or customer segments, taking into account not just revenue but also the costs of serving them.

For my business, ABC provided the granular cost data I needed to perform CPA. By linking activities and costs to specific clients, I could calculate the actual profitability of each account.

This analysis transformed my approach to client relationships. Instead of focusing solely on revenue, I began evaluating clients based on their overall contribution to profitability.

Lessons Learned

One of the most valuable lessons learned from the IBM workshop was the importance of looking beyond surface-level metrics. Traditional costing methods had masked the true dynamics of my business, leading me to underestimate the costs of certain activities and overestimate the profitability of some clients. ABC changed that.

Another key takeaway was the value of data. Implementing ABC required detailed tracking of activities and costs, but the insights gained were well worth the effort. I learned to view data not as an administrative burden but as a strategic asset.

ABC and CPA are often seen as tools for large corporations, but my experience proves their value for businesses of all sizes. By shedding light on the hidden drivers of cost and profitability, these methodologies empower businesses like mine to make smarter decisions.

In the years since that workshop, I’ve continued to refine how my clients can use ABC in their business. Whether I’m evaluating a new client, planning a project, or reviewing my own operations, ABC ensures that every decision is grounded in reality.

How can you use ABC in your business?

The post How to Unlock the Power of Activity-Based Costing first appeared on SteveBizBlog.