Advantages of a One Person Company
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When your business starts to take off there’s a nagging voice in your head that you should be pursuing growth. And if it’s not in your head then it’s probably your friends or family telling you to expand. But what if everyone is wrong? Maybe they aren’t seeing the advantages of a one person company.
But what if we shouldn’t be dreaming about growing our company? What if owning a one man company is the way to maximize our happiness?
Business owners all over the world make a conscious decision not to expand their companies. Below are some of the advantages of a one person company:
No Need To Hire
Never in history has it been easier to get access to a qualified workforce all over the world. While you are asleep in bed a team in India can be working on your latest idea. You can start your day by reviewing all the progress made while you were counting sheep.
And your team isn’t even hard to find and recruit! Freelance platforms like Upwork often host companies with many team members on staff. When you hire the company you instantly have access to an entire roster of specialists.
If you prefer to work with someone local there are tons of other solopreneurs with the skill you need. One easy way to meet such professionals is to join a co-working space. You’ll almost certainly find the talent you need.
It’s always tempting to add headcount. But these days it’s easy to find several people with niche skills. Which is better than hiring one person who has to contribute to your business in multiple ways.
We all have an idealized vision of what our life should look like.
And for many of us, our vision doesn’t include riding a crowded train, or getting stuck in rush hour traffic. Some of us picture being well paid while staying home with the dog. It’s to be home when their kids get back from school. And important to have some “me time” and take in an exercise class. Choosing to stay small is the perfect choice for solopreneurs that love having flexibility.
Having a business with employees doesn’t prevent a wonderful lifestyle. But some adjustments are usually needed. Employees mean more responsibilities. And finding time for things that are important to you requires better planning.
Many solopreneurs can add headcount but choose not to. For them growth is simply defined in a way other than staff count. They interpret growth as a function of improvement. When they get better at their job then they are growing. Relevance in their industry might be more important than improving a business metric.
Some solopreneurs choose not to grow because they don’t want to delegate decision making. When you hire someone you have to give them an opportunity to add value to the organization. But some owners don’t want to let go of their baby. They don’t want to share any part of the business with an employee. They’d just end up being a micro-manager! And when that happens their workload actually increases.
A primary function of a one person company is to generate a healthy living for the company owner. But growing sales numbers doesn’t always mean the owner’s take home pay is increasing.
Savvy solopreneurs recognize that a business is a well-balanced machine with interconnecting processes. This means you can’t grow one part of your business without impacting other areas. For example, an increase in marketing spend could require hiring a sales person. That new sales person might require HR support or payroll resources. They’ll need a phone for sales call and a computer to work on. What starts as one small change to your company can have an escalating impact on your expenses.
One of the biggest expenses for any company is rent. Many solopreneurs work from home. But if they add just one staff member they’ll probably have to move to an office. And even the cost of a modestly priced co-working space for you and your new employee can bite into the bottom line.
Staying small can be a HUGE competitive advantage. Consider companies with large expenses. Their overheads may prevent them from adapting to evolving market conditions. Economic cycles and new technology can disrupt a business very quickly. Companies with lots of overhead can’t always absorb change quickly or easily.
When you are a one person company you can serve larger segments of the market. For example, a mid-size web design company may not be able to serve clients who have a budget of less than $2000. The cost of acquiring the client isn’t worth the nominal profit they might make on the project. Their overheads dictate they can’t accept client projects with a value of less than (ie) $15,000.
Most businesses have their biggest costs in payroll, rent, and marketing. When deciding whether to expand, solopreneurs rely on certain assumptions. One common assumption is their cost of client acquisition will remain fixed. They don’t realize that client acquisition costs can rise significantly as they grow. This is especially true for companies using PPC (pay-per-click) to bring qualified traffic to their website.
Let’s look at an example of how this happens:
Billy sells widgets to other companies. He needs to make 4 sales per month to meet his revenue targets. Billy’s website is pretty good, but not great. For every visitor that arrives at his site via paid search 5% become a lead. Billy will convert 1 in 6 of his sales leads to a new client. Thus, Billy needs 120 paid visitors (1 / 5% / 16.67%) to get a new client.
Billy gets his traffic via Google Adwords. The widget market is somewhat competitive and his average Cost Per Click is $2.25. That means every time someone searches for widgets on Google and clicks on Billy’s ad he pays Google $2.25. If the visitor looks at Billy’s website for 3 seconds and then leaves Billy still pays Google $2.25 for the visitor.
We know that Billy needs 120 paid visitors to get one client and his average cost per click is $2.25. With that information we can calculate Billy’s cost per lead as $45 ($2.25 / 5% conversion rate). Therefore it costs Billy about $270 ($45 x 6 leads) to get a new client. Billy wants 4 clients per month so his advertising budget needs to be about $1,080 per month (4 sales x $45 cost per lead x 16% sales conversion).
When someone types into Google a query like “widget company near me”, companies that are advertising will have their ad shown above the search results. Google Adwords works on an auction system. That means that companies compete against each other to have their ad shown. The company that has the best combination of user experience and pricing bid will be in the top position. The next best bid will be in the second position, and so on. Companies that offer a poor user experience or don’t bid enough won’t have their ad shown by Google.
Here’s the important part. The market size for any business varies by industry and geographic area. Usually there is a finite number of people searching for a specific solution at any given time.
Billy may need to double the volume of B2B sales leads generated, but the market size doesn’t change. In this case he’ll need to appear above twice as many relevant search queries. To achieve this Billy will need to increase his monthly budget. He may also need to increase his bid per click.
Since Billy now needs 8 sales per month he needs at least 48 leads. To get these additional leads he increases his bid from $2.25 to $3. Now his ad is displayed more frequently. But because he is paying $0.75 more per click, his cost per lead jumps up from $45 to $60 per lead. This of course means his cost of acquiring a new client increases from $270 to $360 per sale.
Cost to acquire a new client doesn’t always scale. Sometimes higher marketing costs eat into healthy margins. This makes it hard to justifiy the decision to grow the company.
Compliance + Liability
When you start hiring your compliance costs immediately go up. To begin, you’ll need to make contributions to national or state employee plans. These include unemployment insurance, national pension plans, national health plans, and so on. Beyond the direct cost of the plans there is an implementation cost. You might have to spend your weekends sorting out transfers. Or you can hire a payroll firm to handle these issues on your behalf.
When you hire someone you automatically incur liability. The person you hire may take actions on the company’s behalf that you are not comfortable with. Their actions can become your liability. Other liability would be a harassment suit of some kind. When someone feels the working environment you provide is unsuitable they can make a legal complaint.
Even the best staff need time to achieve peak productivity.
Payments on borrowed funds start immediately.
Financing + Execution Risk
Solopreneurs recognize that increasing staff count increases their company’s risk profile. Types of risk include financing risk and execution risk.
When things are going well it’s easy to think they’d be even better with some employees. That could be true, but how you pay for those employees can affect to your outcomes. If you can cover salaries from existing cash flows the risk from making a bad hire is low. But if you are borrowing money to add staff then the risk of a bad hire is much higher. And remember, even the best staff need time to achieve peak productivity. But payments on borrowed funds start immediately.
You probably know when your electric bill will arrive, and (roughly) how much it will cost. The same is true of payroll and other expenses. Expenses are almost 100% predictable. Unfortunately the same isn’t true of revenues. Some revenues are seasonally strong or weak. Other revenues are dependent upon an external market. And almost all revenues are dependent on where the economy is in it’s broader cycle. If you are increasing your payroll expenses make certain normal variation in revenue generation won’t derail your expansion plans.
Finally, business owners run into proprietary systems risk. This is where the person they hire absorbs everything they can about a business and uses that knowledge to establish their own firm. I once met a professional kite surfing teacher. I asked in passing if he taught at a local kite surfing school. He got quite upset. It turned out the owner of the local school used to be his employee. Once he learned how clients were acquired he left to establish his own facility. This same risk applies across most industries and should be a consideration when hiring.
As companies grow, the more customers they need to support the business. So before adding staff you have to know your market perfectly. Is the market big enough to accommodate your growth? Can you reasonably capture enough market share to justify the increase in staff? Most importantly, what will the market look like during an economic downturn? Will today’s buyers still be opening their wallets tomorrow?
Sometimes a market size is perfect for a one person company. When you factor in all the costs associated with new staff the market may not justify the expansion.
Small is Beautiful
Looking at the many advantages of a one person company, adding headcount seems unnecessary. If there is a particular skill you need it’s easy to find. – just connect with other solopreneurs or freelancers.
Growth for the sake of growing can impinge on an otherwise fantastic lifestyle. There’s something wonderful about working from home or a dynamic environment for solopreneurs.
Growing usually means increased expenses, and all that comes with more overheads. When you increase one expense, others tend to follow. As expenses increase, revenues have to keep pace. There’s no room for error when rents need to be paid and employees need to eat.
Finally, with any new hire there is always the possibility of interpersonal conflict.
So, wouldn’t you agree the advantages of a one person company outweigh the benefits of expansion?