How to evaluate your business idea before you make plans

Traditional Planning for Growth• Starts with an examination of existing products

and services• Expansion is based on selling more of what you

have– Sell more to existing customers– Sell more to new customers• Expand geographically or online• Expand types of customers you sell to

• May or may not involve “tweaks” to products and services to make them more appealing to customers.

Growth in a Recessionary Economy• Starts with finding a customer who has

money to spend in order to satisfy a need• Expansion is based on preferred response to

that customer’s need– Can you marshal the resources needed to

create goods and services that these customers will purchase?

– Can you beat the competition?– Can you do this in a way that will yield a profit?

Implications for Business Growth• Existing products and services may not have

value, but the talents and experience of a business probably do, especially an established business.– Relationships with customers• Knowledge of customer wants• Established distribution chain

– Relationships with employees– Relationships with vendors, suppliers• Knowledge of what they offer• Established credit

– Experience and talent of management

Implications for Business GrowthKey Point: Can you leverage these talents

and experience to create a response to a customer need in recessionary times that can be sold at a profit?

Finding Sales Potential -- Steps1. Perform a quick analysis of the industry2. Choose a focus in terms of a target customer and a

target market3. Evaluate the competition for your target customer

in that target market area4. Perform an in-depth analysis of your target

customer to determine underlying needs that will motivate them to purchase something to satisfy those needs

5. Determine what “package” of goods and services would be needed to cause these customers to buy

6. Test out your concept of a “package” with members of your target customer group?

If there is sales potential • If you have determined that you have

identified a “package” that can be sold to a target group of customers in a market, then – Identify expenses involved to create and sell

that “package”• Identify promotional expenses• Identify production and operating expenses

– Determine whether or not your business can use its talents and experience to create and sell the “package” at a profit.

If Not?• You have saved the time and expense of planning

out a business venture that would not likely succeed.

• You have saved your investment capital for ventures that have a likelihood of success

• You have acquired knowledge and information about your industry, your markets, your competition and your customers that you can use to – recognize the potential for profit in other ideas– quickly evaluate the potential for profit of these other

ideas

Example: BIG-EZ Books• Michelle Carley is the owner of BIG-EZ Books, a

software company that specializes in bookkeeping solutions for small businesses.

• Michelle’s flagship product is BIG-EZ Books, a simple, easy to use, bookkeeping system based on excel spreadsheets that she sells on line. A one year license costs $50.00 and can be renewed for just $30.00

• Michelle currently sells through her own web site as well as through amazon.com marketplace and dell.com – http://www.bigez.com

• Michelle currently has three product lines corresponding to three target customer groups.– Small business (the biggest seller)– Non-profit– Personal

Michelle’s Business IdeaCould Michelle increase sales to new

customers by using accountants and bookkeepers?Have the accountants and bookkeepers

purchase BIG-EZ Books to give to their clients.Have the accountants and bookkeepers refer

their clients to her web site.

Your Plan• Write down the 5 or 6 things Michelle should

do next to check out her idea.• Estimate (gross estimates) the amount of time

and other expenses Michelle is likely to spend checking out her idea

• Indicate how confident you feel Michelle will be that her estimates for the first year sales will in fact materialize using your plan?– What is the potential for loss? (High?

Medium? Or, low?)• Put this paper aside

Step 1: Analyze the Industry

• What information should Michelle collect?– What are the trends in the industry and

markets that Michelle should be aware of?– Is the need for easy bookkeeping solutions

growing or has the economy driven customers out of business?

– Who is providing easy bookkeeping services and what challenges or opportunities do they face?

Step 1: Analyze the Industry• How can Michelle find the information?

– Use the industry summaries available for free through libraries and other online sources

– Use the annual reports of industry leaders (such as Intuit and H&R block)

– Check out trade and professional organizations (such as associations of accountants and bookkeepers) for industry and market reports to members

Step 1: Industry Findings• Michelle may find that with the growth in non-

employee based small businesses, there may be an increased demand for an easy to use bookkeeping system that does not require a knowledge of accounting.

• Michelle may find that the competition (such as Intuit and H&R Block) are targeting a larger small business client that would be more likely to use a double entry accounting system

• Michelle may find that CPA firms are experiencing a lack of growth in audit work (as many businesses fail) and are trying to expand into bookkeeping services.

Step 2: Choose a focusMichelle has chosen as her target customer

the small CPA or bookkeeping firm that performs a substantial amount of its business servicing “one-person” businesses.

Michelle has chosen to focus on Washtenaw County

Step 3: Analyze the Competition• What information should Michelle collect?

– How many competitors?– What do they offer her target customer?– What does her target customer value about

their services?– What is their competitive advantage? (How do

they get customers to choose their services without giving away profit? Loyal customer base? Unique systems (including software)? Or, other?

– Collect information for direct, indirect and potential competitors.

Step 3: Analyze the Competition• How can Michelle find the information?

– Identify competitors (phone book, Google local, reference USA (available at many libraries)

– Visit these competitors (by phone or the Internet may suffice) to determine what they offer to members of the target customer group (and the price they charge ) and why members of the target customer group would prefer them

Step 3: Competition Findings

• Direct competitors– Michelle may find that there were two

companies, Intuit. Microsoft, and Owl that offered bookkeeping software with Intuit being the largest but that the products offered by these companies take time to learn and use.

Step 3: Competition Findings• Indirect competitors (substitutes)

– Michelle may find that there were many accounting and bookkeeping services in Washtenaw county but even the small ones discouraged the type of bookkeeping that involved a “shoe box” or recording entries from a checkbook. At the rock bottom price of $35 an hour, most clients complained.

Incidentally, this “indirect competitor” includes Michelle’s target customer group. The accounting and bookkeeping firms may currently perform a “sort and organize” bookkeeping service for members of the target customer group. But, we hope these firms will want to perform this service using Michelle’s product.

– Michelle may find that many of the clients of these accounting and bookkeeping firms (Michelle’s target customers) are simply trying to muddle along with their own handwritten or spreadsheet systems which makes it difficult for these firms to perform well and efficiently.

Step 3: Competition Findings

• Potential competitors (those entities serving the target customer currently in other ways)– Michelle may find that Staples, Office Max,

Office Depot, Kinko’s and other copy services offer Intuit and Microsoft products but are interested in offering a product that is easier to use such as BIG-EZ. This may represent yet another possible distribution channel

Step 4: Analyze Your Customer• What information should Michelle collect?

– What is the most challenging aspect of preparing the books and tax returns for the small (one person) business client?

– How important to them would it be for this challenge to go away? If possible, what would it be worth to them in terms of dollars?

– What do they currently charge to perform this service for clients (on the average)? If they refuse to perform this service, what are the consequences to them and/or their clients?

– What are some of the other challenges that they face preparing the books and tax returns for the small (one person) business client and how important are these. (If possible, what would it be worth in terms of dollars to get these challenges to go away?)

– How many small business clients do they have that would benefit from elimination of the shoebox? How often would they benefit?

– Would $50 a year be attractive as either a savings to these firms or a savings to their clients?

Step 4: Analyze Your Customer• How can Michelle find the information?

– Interview 25-30 members of the target customer group and ask them.

– Even 5 members could provide meaningful information.

Step 4: Customer Findings• Michelle may discover that most of her target

customers (the accounting and bookkeeping firms) turn away business that involves the “shoebox”. – The firms’ customers are simply not willing to

pay for the time it would take the firm to sort and organize a shoebox.

Step 4: Customer Findings• Michelle may discover that her target customers

(the accounting and bookkeeping firms) would be unwilling to pay $50.00 as a “perk” for their customers (the one-person small business customers). But, firms would like to be able to recommend the software and would like to be able to do so at a discount to their customers.

• Michelle may find that her target customers (the accounting and bookkeeping firms) believe their customers (the one-person small business customers) would be willing to pay $30.00 per year.

Step 5: Design an Offer• List the needs of your target customer group and

match these up with “features” that you will provide in a package of goods and services that your business will offer.

• Determine any missing features in your design in the following categories (delivery, payment, terms of service (including customer service), features designed to build a loyal base of customers and other features designed to sell the offer such as packaging and display.

• Determine a price you will charge for this offer taking into consideration the maximum price the target customer would be willing to pay.

Step 6: Test the Offer• What information should Michelle collect?

– Does the offer motivate her target customer group (accounting and bookkeeping firms) to cause their customers (small business owners) to want to purchase BIG-EZ Books?

– Will her target customer (or the clients of these customers) be willing to pay the price charged?

– How often will these purchases occur and will these customers (the one-person small businesses) return to purchase year after year?

– How likely are they to recommend this BIG-EZ Books to others and how often might these recommendations occur?

– What would be the best way for target customers (the accounting and bookkeeping firms) and their customers (the small one-person small business) to learn about BIG-EZ Books?

Step 6: Test the Offer• How can Michelle find the information?

– Pull together 25-30 members of the target customer group and ask (interview) them• Michelle may also want to interview one-person

small business owners who are the customers of these firms.

Step 6: Test Findings• Michelle may find that 60% of those target

customers interviewed feel that 20 of their customers (the one-person small businesses) would purchase BIG-EZ books in the first year and maybe 5 additional customers would purchase every year thereafter. – This estimate is based on giving a $20.00 first year

discount, (the renewal rate)

• Michelle may find that her target customers feel that approximately 90% of those customers who purchase BIG-EZ Books will return to purchase year after year.

Is there sales potential in her idea?• Michelle will use the results of her analysis to

project sales of $????????,• Michelle will base her estimates on the results

of her research, analysis and tests.– Number of customers • Number of customers brought in through promotions• Number of customers brought in through word-of-

mouth• Number of repeat customers

– Number of times customers will purchase– Amount spent on each purchase

If there is sales potential Estimate expenses of creating and marketing

her offer as well as expenses involved in overall management.

Compute profits based on her estimates of sales and expenses.

Compare Approaches• Get out your piece of paper with your plans• Which approach do you feel more confident

about?• Do you feel the additional time spent in

evaluating your idea would be worth it?– If not, then by all means use your approach.– Michelle has been using this approach in our

coaching sessions to benefit. We have yet to see what the results of this venture will prove. But, we are confident it shows potential.

– Visit http://www.bcebulletin.com to find out more about using this approach.