But avoid these mistakes

Starting a home business can be fun and lucrative, and there are advantages to starting one in a down economy — prices for goods and services you need are down, and businesses and consumers are looking for low-cost alternatives. Good news: You can make the effort much less risky by avoiding five traps…

Mistake: Going it alone. Home-based companies always involve marketing, pricing and other issues that can be tricky, especially for anyone without a lot of business experience.

The right way: Ask one or more knowledgeable, trustworthy businesspersons to volunteer as your advisers. You can often find advisers among your acquaintances. Look for mentors with experience in helping companies get through economic downturns.

Many former executives whom you find locally will gladly offer advice over lunch or after a game of golf. But don’t limit your candidates to retired businesspeople — many younger executives are eager to show off their skills by helping others start a home business or avoid the pitfalls of running one.

Helpful: Get free advice from the nonprofit SCORE (Service Corps of Retired Executives), which puts small-business owners in touch with more than 10,000 executives and former executives. SCORE has a free e-mail service that also allows business owners to receive confidential answers to questions. Information: 800-634-0245, www.score.org.

The segment of the About.com Web site that I guide also offers a variety of advice for home-business owners. The Internet address is http://homebusiness.about.com. And the US Small Business Administration (SBA) has a wealth of free information and courses available through its Web site (www.sba.gov).

Mistake: Faulty research. Even big corporations don’t always do their homework. Classic example: When the Coca-Cola Company introduced its sweeter “new Coke” in 1985, the beverage was greeted with a customer backlash, forcing the company to return almost immediately to its original formula.

Inadequate market research can be particularly serious for home-business owners because they usually offer a single product or service. Example: Several years back, I tried to start a tax-preparation service for senior citizens. I spent time and money setting up the company, and just when it was launched, I discovered that the IRS was offering free tax advice to seniors in the area. I had to scrap my plans.

Lesson: Talk with people who may someday become clients. In my case, I might have contacted members of senior citizen organizations that surely would have told me about the IRS service.

Also look into businesses that offer products or services similar to those that you’re considering. Find out what they offer and what they charge. Keep in mind that even a slight advantage can be critical today, when customers are looking hard for products that offer the best value.

Next, speak with similar out-of-town businesses that might have better pricing or services that you could adapt to your operation.

How: Many small companies have Web sites that describe their services. Enter the type of business and the city where you want to do the research into Google or another Internet search engine to find those sites.

Mistake: No safety net. Given today’s uncertain economy, a broad safety net is essential. When they start out, however, nearly all business owners underestimate what it takes to operate on a day-to-day basis.

Rule of thumb: Don’t start a home business until you have cash reserves for at least four months — and preferably seven or eight months — of expenses. And don’t use today’s prices to estimate future expenses. In fact, when the economy becomes more stable, it’s almost certain that prices will rise.

Many expenses are easy to overlook. Even some small businesses may need computer repairs, legal advice, accountant services and insurance. Your current auto policy, for instance, might not cover damage or liability if the vehicle is used for business. And if you’re not yet eligible for Medicare, health insurance may be costly or not available at all.

Also: Your homeowner’s policy won’t cover inventory and may not fully cover a business computer and other home-office equipment. Best: Get a rider to your current policy or a separate business owner policy.

What to do…

  • Talk with your adviser and/or other home-business owners about these expenses and other safety-net issues, especially the ones that they themselves originally overlooked.
  • Take the free courses available online through the SBA or look for courses that can help you through your local college. Even if you’re experienced in business, these courses can be invaluable in helping you understand and plan your expenses.
  • Mistake: Pricing blunders. You don’t have to underprice your product or service to beat the competition. In fact, if you set prices too far below the normal range, customers may suspect poor quality. Even worse, it will be more difficult to raise them later when your own expenses rise.

    Tactics: Price your product or service slightly below your competitors — but high enough so that you make a profit. Or, if you offer something that competitors don’t, consider setting your prices above average to call attention to what you can advertise as your “unique service” or “superior workmanship.” This is your “value proposition” — what you bring to the table that makes your product or service worth the higher price.

    Prices can be volatile in stressful economic times, like those today when competitors may suddenly lower their prices. Don’t be caught off guard. Instead, be ready to…

  • Lower your costs so that you can reduce your prices, or…
  • Market your product as more expensive but of superior value based on your value proposition.
  • Mistake: Ignoring the Web. Not long ago, Web sites were expensive and difficult to operate. Today, they are far less costly and can be cost-effective for home businesses. Reason: Many customers search for businesses on the Web — whether an accountant, petsitter, tutor, catering service or any other type of company that can be run from home.

    Do you need a Web site? The answer is usually yes if your competitors have them, especially if you can use the site for marketing or plan to sell products or services online.

    Example: You can keep your business in the forefront of your customers’ minds by asking your Web site visitors to sign up for a free e-mail newsletter.

    Still, if you have doubts about putting up a Web site and a Web site is not necessary for the type of business you want to own, consider starting your business without one. You can always add one later. Meanwhile, advertise in local newspapers and in the yellow pages, especially if your business is focused on servicing local customers. Many small businesses find it profitable to advertise in addition to marketing through their Web sites.

    Web sites are inexpensive, though pricing varies substantially among companies that host them. Typical: Less than $500 (depending on your computer skills and how much help you need) to launch a site and about $25 a month to run it. Many companies that host Web sites have standard layouts for small-business sites and make it easy to control the content from your laptop or home computer. Example: Yahoo! Small Business at http://smallbusiness.yahoo.com/webhosting.

    To find other companies that specialize in hosting home-business Web sites, ask local computer stores or the person who services your computer, or search on the Web for “home business Web hosting.”