Understanding whether your business is candy, a painkiller, or a vitamin helps business owners and investors alike to know where a business stands in the market. These categories offer insight into the decisions consumers make.
Categories force business owners to think about the type of value they provide. For example, people value DNA kits because it helps them with their health, and people value chicken coop doors because they help them keep chickens (and profits) safe.
In great markets, sales of luxury purses, a candy business, are high. In a recession, sales for these types of non-essential items may plummet.
Categories are also important for exit planning. By nature, candy businesses do not have the strongest valuations. Candy businesses are very dependent on the market and seasonality. Despite a great product and great marketing, actual sales performance for these items is based on the overall economy. Do people have ample disposable income? Are people being more conservative about spending because they believe an impending financial crisis will happen? In these settings, great candy businesses may fail to meet sales goals.
Investors are more interested in vitamins and painkillers. These are items that consumers either feel they should buy or need to buy. Products and services that fall under these categories are far more recession-resistant. Historical sales data is more reliable in these industries, so vitamin and painkiller businesses have higher and stronger valuations.
Candy businesses are not bad businesses. Many candy businesses are strong contenders in multi-billion dollar industries, but these are not the strongest businesses an entrepreneur can own when it comes to exit planning and acquisitions.
How soon can transitioning from candy to vitamin to painkiller impact the value that investors are willing to pay for a business? Investors want to see history. History gives the most concrete proof that a business is profitable and works as a system.
It takes time, typically months or even years, to show the historical impact of the change. Investors need tangible evidence that the pivot from candy to vitamin or vitamin to painkiller is having a significant and permanent impact on profits. They want to see that customers understand the value of the product and service and have moved it to a different category mentally.