The Classic “Purpose of a Business” Might Actually Put You Out of Business

It’s surprising to me how often I see all the classic definitions of a business that don’t define or describe a business well at all. If you follow them, they might even put you out of business.

Most of the better definitions still only define or describe ONE PART of the purpose of a business, but not the whole enchilada. Examples of the most common definitions I’ve heard over the years:

The purpose of a business is:

  • to make money.
  • to fulfill a human need
  • to serve the stakeholders.
  • to provide goods and services to the population.
  • to maximize shareholder profit.

The Purpose of a Business must create sustainability or it’s not inclusive enough. If you focused solely on any of the above, you would go out of business. Peter Drucker has the most famous definition. But the quote from him I see most often is only 1/3rd of the purpose of a business: Drucker – “There is only one valid definition of business purpose: to create a customer.” Follow this slavishly and you will go out of business.

I’ve also occasionally seen an expanded version of that which is closer and captures 2/3rds of the purpose of a business. I don’t know if this is truly Drucker’s statement or someone has added to it: Drucker – “The purpose of business is to create and keep a customer.” I have also heard this with the words “acquire a customer”, or “retain a customer”. But a focus on these two things will send you out of business, too.

Here’s mine and what I believe to be the most inclusive purpose of a business:

The purpose of a business is to acquire and retain customers profitably.

The reason this is the best definition of a business is that it is inclusive of all the three things that will keep you in business for the long haul. 1) acquire, 2) retain and 3) be profitable. The others all leave at least one of these three out.

Acquire

If you focus only on the Drucker definitiion of creating customers but you don’t work hard to retain them, you create a revolving door. People buy great marketing only once. Acquisition isn’t enough, you must work hard to retain by having a great product/service and the best customer service.

Retain

If you focus only on a great product or service (retaining), but don’t have a great system to acquire, you fit in the category of a lot of businesses who think that because they make a great chair somebody ought to buy it. It’s a high quality way to go out of business.

Be Profitable

But even if you’re great at both acquisition and retention and you don’t set your pricing to be profitable, you’ll be out of business very quickly. And conversely, if you’re simply very profitable at the expense of acquisition or retention, word of mouth will quickly put you out of business.

Focus on all three – acquisitions, retention, and profitability. Check your business against these three and shore up the one or two that is keeping you from creating a great business.

By the way the purpose of OWNING a business is radically different than the purpose of business in general. People get these two things confused and it significantly endangers their ability to grow the business they always dreamed of. Next week will talk about the purpose of OWNING a business.

From Hostage to Prisoner – the business road to more freedom

Just about every business owner I know is a hostage to his or her business. How do we break free? By first becoming a willing prisoner in your business.

It sounds nuts. How am I a hostage, and how does becoming a prisoner put me on the road to freedom?

Shrinks tell me that six months as a hostage has more lasting negative effect on someone that a number of years in prison. Why? A hostage has no idea when they will get out, the rules change every day, things that got them relief on one day get a whole different reaction the next day. It could all end badly tomorrow without notice. Everything is up in the air all the time, chaos reigns, and the lack of any knowledge about the future makes it all seem futile and endless.

Sound like your business? Most business owners are hostages to their business with rules that change daily, a reactionary way of doing business, and no end in sight.

A prisoner knows exactly how long they are in for, what the rules are and even how than can get out early for good behavior. It’s difficult for a hostage to be encouraged and have hope because the future is a big unknown. A prisoner always has hope and can be encouraged that every day is a step closer to freedom by just doing the right things.

You need to become a prisoner on the way to freedom in your business and here’s how:

He who makes the rules wins.

Most of us let our business create the rules for us and we simply react to everything coming at us. To fix this we need to believe we can start setting the rules for our business and have it start reacting to our needs.

The only way I know to do this effectively is put in place the biggest thing that differentiates a hostage from a prisoner – an end date, or what I call a Business Maturity Date. Decide what your Ideal Lifestyle looks like and when you want to be there. This is the first step to moving from hostage to prisoner to business freedom (see other posts here on picking a Business Maturity Date).

Working toward a date at which your business will begin to be mature can change everything in business for you. Without it you’ll just be a hostage for decades to come.

But what if I “fail” to get my business to maturity (the business can make money and function without me while I’m on vacation) on that date? The only failure is to not try. If you decide you don’t want to take the risk to build a mature business by a specific date, you are ensuring a 100% failure rate for ever getting there.

A man still finds his destiny on the path he chose to avoid it.

Pick a business maturity date, move from being a hostage to a prisoner, and that will ensure you will get to freedom.

Why Capitalists Need to Embrace Social Entrepreneurship

Some capitalists seem to be very threatened by the idea of social entrepreneurship either because it has the word social in it (too close to socialism for comfort), or because they think they’ve always been socially responsible and this new phrase does not recognize that. It’s not new and it’s not socialism, but it is different than what many capitalists practice.

Where I sit – I’m a capitalist who believes that social entrepreneurship (it’s not a great use of the word entrepreneur, but I’ll go with it) is the surest route to making more money. If we focus on the needs of others first, we will, over time, do better than those who put their own interests ahead of others. Greed does work in the short run, but it is never sustainable in the long run. I believe a majority of capitalists would agree.

Where I stand – Every dollar earned by anyone in a legal way does some social good by creating a ripple effect behind it from the spending it also creates throughout the economy. This is a real, tangible social benefit that is at the root of my fellow capitalist’s argument that they don’t need someone to tell them they need to become a social entrepreneur. The term irritates them because it implies the economic impact of their business doesn’t already create massive social good. And it absolutely does.

But the difference between the social effect of traditional capitalism and the social effect of social entrepreneurship is the difference between passive and active.

As a capitalist, I understand very well that I don’t have to do a thing beyond sell something, hire someone, make a profit and begin spending to create a significant wake of passive social good with my business. But how much more powerful could my impact be if I was actively and intentionally using my business to do good beyond the passive revenue effect?

The fact is that a large minority of business owners has always been intentional about both making money and making an impact in the world around them. A good segment of businesses have always been actively involved in non-profits, building businesses in disadvantaged neighborhoods, hiring people others wouldn’t, giving better benefits to their employees and looking for ways to use their businesses to do intentional acts of sustainable kindness.

But these are not the capitalists I know who have problems with the term “social entrepreneurship”. It’s largely those who are passively social via revenue production who have trouble with it.

I think the term has real positive value in recognizing those business owners who go beyond the clear and undeniable passive social benefits of just creating a healthy business. Those companies that are much more intentional and active in creating significance in the world around them should be recognized for going the extra mile. It might be clearer to call all business owners social entrepreneurs and just put the word passive or active in front of each as it fits, but that would introduce even more political correctness to an already overly corrected world.

All businesses are socially beneficial. I believe those that are socially intentional and active beyond the generation of revenue are much more likely to make a bigger impact and also more money. Even if a capitalist doesn’t have altruistic motivations, they should practice social entrepreneurship just so they can make more money. We’ll all be better off.

You either live in a world of abundance or a world of scarcity. Whichever one you choose affects every decision you make.

Live well by doing good.

Every capitalist business owner would make more money if they did.