You know that Warren Buffett saying:

I am a better businessman because I am an investor and I am a better investor because I am a businessman.

I am an investor but not a businessman. I met somebody who was a businessman but not an investor. We were both of the same age and had just resigned from our corporate careers. So naturally we had a lot in common – anxiety and self doubt!

My new friend was a very good learner though. His business was into handicrafts and  also conducted training for other women in that craft. He learnt a few ideas from investing and applied to his own business to see some big positive improvements. Now, he credits me for those ideas, but I  admit that those ideas are not mine. I may have been parroting whatever Buffett and Munger have said.

What were they?

Rule of 72. The Rule of 72 is a thumb rule to calculate how long it would take to double your money. For example, if the rate of return is 10%, it would take approximately 72 / 10 = 7 years to double. And if your rate of return is 15%, it would take approximately 72/15 = 5 years to double.

Reinvestment in business. Businesses with a high Return on Capital and a runway to reinvest should ideally reinvest, as they would see compounding effects. (Combine this with the Rule of 72.)

Premiumization. By offering premium products, the gross margins and net profit margins go up. A lot of dairy companies, for example, may start by selling milk but very soon they start offering premium products like butter, cheese which are priced much higher. They add to the sales and even more to the profits.

Positioning. One of the books I read and loved was ‘Positioning’ by Al Ries and Jack Trout. The authors give examples of several businesses that positioned their product or service differently to capture share of mind.

My friend, who invested mostly in Fixed Deposits (FDs) started to think of new avenues to invest to double faster (Rule of 72). He realized his business that has a Return on Capital of 35% would make a far better investment than FDs and therefore he redeemed about 20 Lakhs of FDs and invested that sum in expanding the floor space of his operations (Reinvestment). At about the same time, he started to focus more on high end customers like boutiques and high end sari shops (Premiumization).  To differentiate his business from others in the market, he positioned it as “by women, for women” (Positioning).

Net result: his business saw a jump in turnover of over 4X in less than a year.

And here are a few lessons I learnt from the way he operates:

Frugality. My friend had a humble beginning with many financial struggles along the way. Therefore, his business has very few overhead expenses. He uses Google My Business and Facebook extensively to market his business. In fact, he has spent only a few thousand Rupees on paid ads and most of the digital marketing is through the use of key words, photos, videos and customer reviews. Given his reach on the Internet, even Google came knocking at his door to feature his business with a special mention at Google For India 2019.

Treating customers well. All businesses will tell you that they love their customers. But when the inevitable screw ups happen is when you see their true love.  Last year, a courier company misplaced their shipment to their customer. When the customer called to complain, they immediately apologized for the mistake and without any debate refunded 75% of the value of the product. They then took the courier company to court and with the compensation they received, they refunded the remaining 25% to the customer too! Oh by the way, they took the customer’s word for the price of the product and not their own assessment.

Contrast that with a similar experience that another friend had with an eCommerce company, last year.  (Subtle hint: The eCommerce company is operated by a salt-to-steel conglomerate group). My friend purchased a phone worth 15k from the e-retailer. The phone was stolen in the delivery process and replaced with a phone worth 1k. When my friend called up the eCommerce company, he was told there must have been a mistake at his end. After several attempts to get their attention and out of frustration, we took cudgels against the company on social media. In the end the company admitted its mistake and the money was refunded. We had to go through all this with a group that calls itself ethical!

Treating employees well. Their entire setup has only women from very poor background and they are trained to earn a livelihood. They are paid above market wages and they help them put down security deposit when finding accommodation.

In short, my friend’s small business is an ecosystem where every stakeholder- customer, employee and the business owner, goes home happy.  They are not serving one at the cost of the other. As Charlie Munger would say “operating in a seamless web of deserved trust”.

Now, I was lucky to come across one such listed company in India. It has the lowest price and yet the highest profit margin. By offering such low prices, the company can serve those at the bottom of the pyramid. The founder CEO lives a simple life and takes no salary or royalty and therefore has thrown in his lot with the small shareholders. You can email him about his services and he will respond. Every time the price of his company’s shares fall, he goes and buys more shares from the market thereby putting his own money where his beliefs are.

Like my friend’s business, it is an ecosystem where all stakeholders win.

Thanks for reading!

 

PS: If you liked this blog, you may like my blog on another friend’s business.

Featured Photo: Photo by Tyler Nix on Unsplash