I’ve been busy answering this question since Tilted Pixel Inc. was founded last year. In my previous ventures spending on growth was sparodic and rarely well planned resulting in seriously suboptimal results. With hindsight being 20/20 I’ve been approaching spending in a much more careful way.

Every business is in danger of the same problem, and many business owners have drowned the seed of their idea by spending like large companies despite having 1% of the budget. Some may cry “this was a necessary marketing expense” even as the repo trucks drive away! I’d like to propose that you avoid this mess by stealing an economics theory and choosing to behave in the manner that it predicts.

First we need to remember that in business there is no such thing as perfect. You never have enough time or money to do what you should, and a major part of consistent success hinges on you being able to create something great inspite of the imperfections that abound. It’s particularly tough to do when starting out as you begin to try to reconcile the vision in your mind with the reality you live in. You can’t have it all so what do you choose?

My economics-based answer is spend the next sum of money that you can afford on the purchase that provides to you the greatest marginal utility.

This is my fancy way of stating two simple ideas:

1. Devote your cash to the items that will bring you the greatest return (highest marginal utility per $ spent).
2. Don’t make an expense that you can’t afford.

In economics marginal utility (the value that you receive from the next of that item) can be used to predict how resources are allocated between multiple expenditures, with the theory that the optimal mix is the one that gives you the “most utility for your buck”. In other words the sum of the utility you have received from your chosen amount of spending on each expenditure is at a maximum.

Economics isn’t business advice however, it’s a set of theories on how the economy and its participants tend to behave and is thus based on interpretation of real world behavior. The above tells us that rational profit seeking businesses tend to allocate their money in a manner that attempts to maximize the desired return. With the idea of marginal utility it also provides a neat model of measuring this numerically. This leads me to suggest that we consciously attempt to use this model to behave in the manner that economics theory suggests we will behave. How’s that for making you dizzy?

Putting It Into Practice

We have a simple model now to help keep spending wise and on track. We will only focus on new spending and assume that any existing expenses of your business are already optimal. In reality you will want to re-evaluate your expenses to fit that assumption, which you can do by applying this model to each expense and lowering those that do not fit your conclusions. You will likely save a hefty chunk when you analyse your expenses in this way even if your original spending decisions were made carefully.

In addition to making a point about marginal utility I made a separate point about only spending what you can afford. This is technically redundant since academically I could argue that a marginal utility calculation truly mirroring real life could award a negative result to purchases that will harm your business. This is unnecessarily anal and tedious so I will instead say that your spending on the growth of your business must not be done at the expense of your ability to pay your bills right now. This means carefully mapping out your cash flow and achieving a current ratio that lets you sleep at night.

You will now make all your purchases according to the calculation of marginal utility that we will apply. For the most part you will rarely ever sit down and attempt to compute an absolute number for this. Marginal utility is only useful in this spending model when compared to other marginal utility amounts, and in general we are going to care about significant differences such as “an order of magnitude greater” or at least “double that of”. It would be quite futile to attempt to perform such a subjective calculation to any greater accuracy.

When looking at the marginal utility I define it roughly as “the purchase’s ability to make my business succeed in the long run”. Very simple definition, but measuring it is very tricky. I want to use the limited resources of my business in a way that will get me the furthest ahead of the game in the long run, meaning that it is best suited for my business to grow. Beware that timing is implicitely factored into this! A key mistake that businesses make is trying to grow too fast, straining resources to the point of financial collapse. Perhaps buying a fancy 3D sign for your new store will attract more customers in the long run and build strong brand recognition, but if it costs you 85% of your available marketing budget I guarantee you that is not your fastest path to growth (and will likely ruin you). When considering the long run effect of a purchase you also have to consider the short run effect to adequately calculate where this purchase will really lead your business in the future.

This model is effective and worth using because it helps highlight the tremendous difference in your return per dollar on various expenses - the very same problem that I highlighted at the start of this article. I mentioned overlooking critical expenses, those that would have provided me a tremendously high return on my money. Rather than seizing the opportunity of those expenses I made decisions that simply would provide a return, failing to always recognize the tremendous marginal utility differences involved. Since money is finite, choosing to spend it in one place necessarily forgoes spending it elsewhere at the same time (opportunity cost).

I recently upgraded my PDA to a BlackBerry to improve my ability to access the internet from anywhere. Despite the rather high monthly service cost, the device easily pays for itself multiple times thanks to the time I save not hunting for a WiFi access point when I need to reply to an e-mail urgently. It also allows me to compose e-mails in situations where my PocketPC did not thanks to the fully QWERTY keyboard. The marginal utility on this device is very high, but only because I am actually able to take financial advantage of the benefits that it provides. Had I bought this device when my business had first started I would have received very little time savings since the company was far less busy, but I would be paying the same high monthly fee. To add insult to injury that monthly fee would have been draining valuable resources that would be far more beneficial if devoted to printing business cards and attending client-gaining networking events. At that point in time the BlackBerry’s marginal utility to me would have been very low.

That’s all there is to it. I make the purchases that I would be crazy not to, so as to gain the most value from the money that my business invests in its growth. I don’t buy something because my competitors do or because it will be useful to me eventually (beware the trap of making a major expense on something you can get a good deal on now, but which you won’t need for a long time). Regardless of what the long-term prospects of my business my be, I recognize that at any moment I only have a certain amount of money to invest into it, and that money must be distributed to the expenditures that given my current business situation will have the greatest long run positive effect.

Bear in mind that this is primarily a mental mindset to condition yourself into using so that you do not fall prey to ill-conceived decisions or premature purchases. You can apply it in an Excel chart, but you can also run through it in your head while at the store. It is not something that should be scribbled out in long and dreary calculations on paper, as such time-consuming advice is rarely followed (see the lack of business plans for proof).

Successfully building a business around a product is a wholly separate area of expertise, not something that you kind of pick-up as you release it. Yet that’s something I very much did with CustomBar, a terrific piece of productivity software that I devoted the larger portion of 2 years of my life to developing. I was very much a software geek first and business man a distant second, consequently making many of the same mistakes as hundreds of other shareware authors. The result was making only 10% of the profit that the software could have made (a very conservative estimate).

The initial launch did fairly well and my inbox filled with sales. This is also the only time where I really thought about the marketing and spent serious time putting things together. However I lacked the knowledge that I needed to build something that would continue to grow and receive attention long after the last news article on a popular software site had sunk to the bottom.

Two years is a long time to invest in a product when you end up making a grocery list of amateur mistakes when finally selling the thing. Yet that’s one of the reasons the business start-up failure rate is so incredibly high; I was the rule and not the exception. I was very strong in a technical skill (programming in this case), had a great product idea, but not nearly enough business knowledge to make it viable.

If you are the brains behind the world’s next big mouse trap then learn from these mistakes. It’s not easy to come up with a viable business model and strategy to execute it. Top CEOs of billion dollar companies get it wrong all the time, and surely they must have a little bit more experience than simply picking-up a marketing book. Aquiring a combination of experience and knowledge will put you light years ahead of the inventors out there that dived right in. If your Big Idea will still be there in a year or two perhaps it’s best to try a smaller business first? If you don’t yet have a Big Idea then there is even more reason to start a smaller business now, as you will have the necessary experience when you do have that Idea.

Inevitably the next question that has come up in most readers minds is “but what other business could I possibly start?”. Believe it or not, you don’t need to create something new and revolutionary to launch a company and start making (or losing) money. That’s actually a very risky path compared to taking an existing product or service and simply doing a great job of providing it. Businesses that tend to be inexpensive to start are those that do not require a large investment in materials or commercial location. Digital products work well, such as software, ebooks, online courses, web services and so on. The internet also happens to be a fantastic way to get experience in marketing strategies as investment is generally low and you can accurately measure results within days instead of months. If that’s not your fancy do not worry. You can take advantage of virtually any real skill, and the less formal education it requires the better for you (it is much easier to start a landscaping business than a biotech company).

One catch is that you do have to put serious effort into the business and want it to succeed. You are starting small so that later on you have the foundation to go big. It may even be that you succeed on your first try and want to continue developing the business. My own primary business, which I plan to grow and expand for many years to come, started out as a side web hosting venture years ago by another name. You won’t get anywhere putting in a half-hearted effort into something, and you won’t learn a whole heck of a lot either.

If all that you do is Build It, the only customer will be your mom.

You want your dream to succeed. Maybe it’s a great piece of software that you are putting every bit of effort into after 8 hours of database programming in some dull cubicle (if that’s the case read this legal issue). Maybe it’s a music school you’ve been sketching plans for while finishing your degree. Maybe it’s a $29.95 product that will be sold in retail stores across the country if you can just convince them that people will buy in droves. Great products are created by people specializing in the related field, not by armies of people in suits and ties (those guys are all managers and accountants working for someone else). You don’t necessarily need a business degree to succeed in running a company. However don’t let yourself stumble so hard that the fall kills you just because you’ve never navigated terrain like this before. Aquire all the business knowledge that you can for your new company, either by getting some experience launching a smaller venture first or by finding a partner who has done it.

What happens with CustomBar you ask? It gets a new 1.1 release in Winter, accompanied by major fixes to the business model (which is where the delays on the update actually come from). That’s the first block of time I will have since Tilted Pixel’s launch in September to revisit things and get it moving again. In the meantime sales continue to trickle in, but at a much slower rate than I would ever be willing to find acceptable.

Last week I finally received papers stating that I now own my very own corporation (federally registered in Canada)! Tilted Pixel Inc. is now my 100% owned-by-me corporate baby. As you can probably tell by the reduced posting frequency I’ve been working extra hard to pull together everything related to that while keeping up with the ever-increasing work queue.

Incorporation of the company represents a bit of a graduation ceremony from a small business idea to a serious commitment and a validated business model. Less than a year ago I had a registered sole proprietorship, business cards, a single client, and three oversized photo prints with the company logo (for “exhibitions”). I now have three website projects on the go at any given moment and a solid plan for expanding the company further and further. Keeping the business profitable and growing has been a matter of applying what I’ve learned in my previous ventures and sticking to the fundamentals of building the business one solid block at a time.

What makes Tilted Pixel work? It’s actually a very simple concept, albiet shockingly ignored in the website development world. Tilted Pixel delivers what clients ask for with websites that are built to spec and can be edited by the client rather than requiring the web developer. I’ve invested the past three years into a terrific website development architecture custom built exactly to deliver on this promise. It would have been easier in the beginning to use an off-the-shelf solution, but had I gone this route I would have lost control over the services and capabilities that I am able to offer my clients. The software would have ruled the company. With my architecture I never have to feel restricted since even if a capability is not there I know it can be created.

I’m basically tooting my own horn in this post but this milestone is tremendously important to me and something that I feel like sharing with all my readers Feel free to post stories of your own business start-up achievements in the comments!