Startup Boot Camp

Kick Starting Success for California’s Retail, Restaurant and Service Entrepreneurs!

Day 1 — Session 2

MARKET RESEARCH

Market Research

It’s not what:– You like– I like– Your neighbor likes– Your spouse or partner likes– Your dog likes

It must be:– Independent– Factual– Quantitative– Timely

“The aim of marketing is to know and understand the customer so well the

product or service fits him and sells itself.” — Peter Drucker

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Types Of Market Research Primary Research – talk to the customer:

– Focus groups– Mall intercept studies – “exit” interviews– Zoomerang & Survey Monkey for the web– Telephone surveys– Customer interviews

Secondary Research – data collected by someone else– Internet – Libraries/research librarians

Observe what the competition is doing– Tradeshows– Trade publications

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Uses Of Market Research Validate business concept or marketable idea

– Determine the size, current state, growth potential and trends in your industry

– Identify other products/services that potential customers buy instead of yours for the same purpose

Information to modify/improve the product– Product line extensions– New categories

Refine your message to your customer

Identify your consumer

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Consider . . .

Assessing, adjusting, adapting to the market are a constant in a successful business!

When do you stop doing Market Research: Never!

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Example

Assume you want to start a retail store that sells pellet stoves as described below. Take out a blank piece of paper and write down 5 potential sources of information on the market and customer for this product:

What is a pellet stove?

It produces relatively clean heat by burning small cylinders of compressed saw dust. It is self-igniting, controlled by a thermostat and can be equipped with a battery backup. It is useful as a home heating source and particularly useful where power may be subject to disruptions.

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Example (cont’d)

Trade Association - Yes– Hearth, Patio & Barbeque Association

Trade Show – Yes– Hearth, Patio & Barbeque Expo

Trade Publications? Yes– Biomass Magazine– Backwoods Home Magazine

Newsletters? Yes– off-grid.net

Company SEC filings, Industry Reports, Articles, Retail Store visits, etc., etc., etc.

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Learn More About Your Customer Take out the second sheet of paper with

“Customer” on it. You previously wrote down characteristics of your target customer on this sheet.

Take 3 minutes and identify sources or ways in which you can use primary or secondary research to validate your ideas or find out more about your customer and market.

Now, do the same for your product/service

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Examples of Market Information SBDCnet — Speak with your SBDC Business

Advisor

Examples of Market Research Sources:– Business Stats: http://www.bizstats.com– General Demographics:

http://factfinder2.census.gov/faces/nav/jsf/pages/index.xhtml– City Information: www.city-data.com– Segmentation overview:

http://www.netmba.com/marketing/market/segmentation/

Reference Librarians

Tradeshows/Trade Publications

Your Competitors10

COMPETITION

“I have been up against tough competition all my life. I wouldn't know how to get along without

it.” – Walt Disney

Types Of Competition How do you define your competition:

– Direct (e.g., McDonald’s vs. Burger King)– Indirect (e.g., McDonald’s vs. Subway)

Online vs. Offline

New or well entrenched

Always consider current and future competition

Be vigilant for new market entrants

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Competition As An Advantage Don’t view your competition as a threat

They’ve already done some work for you. Learn from them/from their mistakes

How do they market? Why?

Who is their target customer (remember the bike shop)?

Is information available on their cost structure?

Learn from industry consultants — industry events

Network

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Competitive Advantage

Competitive advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors.

To achieve a sustainable competitive advantage you must:– Operate at a consistently lower cost, or– Command a premium price

Cost/price advantages can be achieved in two ways:– Do what your competition does better/cheaper– Do things differently from your competitors – in a way that

delivers a unique type of value to your target customer

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What Will Make You Special?

Location

Free delivery

Quick turnaround

Customization

Convenient hours

Unique product/skills

Customer support

“Number one, cash is king... number two, communicate... number three, buy or bury the competition.”

– Jack Welch

Note: This is a list of features. Remember the discussion of features vs. benefits.

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Competitive Analysis Use many of the same techniques and resources

as Market Analysis– For locally based businesses visit/observe your competition

• How many are there?• How do they market/sell? To who?• What products do they carry or services do they offer?• What do they charge?• How busy are they?

Use tools like SBDCnet

Create a competitive matrix“You can observe a lot

just by watching.” — Yogi Berra

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Competitive Matrix

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Example Take 5 minutes and on a blank sheet of paper, identify competition for:

Is it direct? Indirect? Online?

List 5 things this business can do to create a competitive advantage?

A hardware store

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Example (cont’d)

Direct– Other local hardware stores– Big box stores like Home Depot/Lowes– Internet retailers of hardware products

Indirect– Contractors

Potential items of competitive advantage– Location, contractor specials/discounts, specific products,

inventory levels, parking, hours, helpful staff, etc., etc., etc.,

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IP As A Competitive Advantage Intellectual Property (IP) can be a very valuable

asset

Trademark: any word, name, symbol, or device, (or any combination thereof) used to identify and distinguish goods or services and to indicate their source

Word Marks: KODAK

Design Marks:

Composite Marks containingboth words and design:

Slogans: WE BRING GOOD THINGS TO LIFE

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IP As A Competitive Advantage

Types of Trademark registration– Common Law – unregistered; derived from use “TM” in marketing

materials– State Registration – the “truly local.” Registered with one or

more U.S. states– Federal Registration® - interstate commerce or between the

U.S. and another country

Federal registration is not required, because trademark rights (in the U.S.) arise from use on or in connection with goods or services, but there may be advantages to federal registration

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Who’s Your Competition? On the fourth sheet of paper, labeled

“Competition” identify your direct and indirect competitors

Identify 3 ways you can find out information about them

What’s your competitive advantage? Why will people buy from you?

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PRICING

“You can have anything in this world you want, if you want it badly enough and you're willing to pay the price.”

– Mary Kay Ash

Only Ways To Make More Money Sell more

Cut costs

Raise your price

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Pricing Strategies Must make sense given the:

– Markets served/target customer– Products/services offered– Operational costs/method of distribution– Competition/perceived competitive advantage

Only 3 strategic choices:– Premium– Market– Value

Many pricing options:– Suggested retail– Volume discounting– Wholesale pricing– Cash and early payment discounts– Seasonal pricing – Price flexibility

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Determining Prices No magic bullet Based on the interplay of a number of factors

– Who’s your target market– Your positioning (premium, market, value)– What competition charges for similar product/services– Your perceived “value” to your customer (your “value

proposition”)– Your objective

• Obtain market share• Maximize profits• Maximize revenue

– Your cost structure• Fixed overhead• Cost of goods sold• Profitability/target gross margin

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Pricing Is Key An ineffective pricing strategy is one of they key

failures of small business

Businesses must price to cover the direct costs of production, variable overhead, fixed overhead, owner wages, and profit — more on this tomorrow

After businesses know what they want/need to charge, how does it “fit” their market?

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Basic Pricing Strategies Cost-plus pricing

– Adding a standard markup to the cost of the product.– Popular because:

• Sellers more certain about cost than demand• Simplifies pricing• When all sellers use, prices are similar and competition is

minimized

Value-based pricing– Uses buyers’ perceptions of value, not the seller’s cost, as the

key to pricing

Going-rate/Competition-based pricing– Firm bases its price largely on competitors’ prices, with less

attention paid to its own costs or to demand.

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Market-Skimming– Set a high price for a

new product to “skim” revenues layer-by-layer from the market

– Company makes fewer, but more profitable sales

New Product/Service Pricing

When to use– Product’s quality and image

must support its higher price– Costs of smaller sales

volume cannot be so high they cancel the advantage of charging more

– Competitors should not be able to enter market easily and undercut the high price

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Promotional Pricing

Low-Interest Financing

Longer Warranties

Free Maintenance

Discounts

Cash Rebates

Special-Event Pricing

Loss Leaders

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Key Points

Compare the pricing needs with the market needs/values

You can have higher prices for items if you bundle them together (e.g., entrees with sides)

Remember, companies sometimes do what they THINK is correct when they are going into business or things are slow — they lower prices to build volume. Once lowered, it is hard to bring them back to normal

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What Is Your Price Strategy

Based on your work so far (your target consumer; understanding of the competition; product/service description), take out the fifth sheet of paper labeled “Pricing” and take 3 minutes to write your initial thoughts on factors you will consider when establishing prices and how you can potentially find out more information to help

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ADMINISTRATION/FINANCE

“The company accountant is shy and retiring. He’s shy a quarter of a million dollars. That’s why he’s retiring.”

– Milton Berle

Basics Open a business banking account

– Helps maintain accounting/tax records

Hire a qualified bookkeeper and accountant as soon as possible

Establish a good record keeping system– Electronic and manual

Importance of good records– Monitor your progress– Prepare financial records– Track deductible expenses– Prepare and support tax reporting– Historical sales data improves inventory management efficiency

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Requirements Of A Good System Simple to use Accurate Timely Consistent Understandable Reliable and comprehensive

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Records Retention

IF you... THEN the period is...

1. Owe additional tax and situations (2), (3), and (4), below, do not apply to you

3 Years

2. Do not report income that you should report and it is more than 25% of the gross income shown on the return

6 Years

3. File a fraudulent return Not limited

4. Do not file a return Not limited

5. File a claim for credit or refund after you filed your return

Later of: 3 years or 2 years after tax was paid

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Taxes Become familiar with basic responsibilities even if

you have a qualified outside professional– http://www.irsvideos.gov/virtualworkshop/ — a very good resource!

• The Virtual Small Business Tax Workshop is composed of nine interactive lessons designed to help new small business owners learn their tax rights and responsibilities.

– Lesson 1 - What you need to know about Federal Taxes and your new business– Lesson 2 - How to set up and run your business so paying taxes isn't a hassle– Lesson 3 - How to file and pay your taxes using a computer– Lesson 4 - What you need to know when you run your business out of your home– Lesson 5 - How to set up a retirement plan for yourself and your employees– Lesson 6 - What you need to know about federal taxes when hiring

employees/contractors– Lesson 7 - How to manage payroll so you withhold the right amount from employees– Lesson 8 - How to make tax deposits and file your payroll taxes– Lesson 9 - What you need to know about Federal Unemployment Taxes (FUTA)

– IRS Publication 583 – Starting a Business and Keeping Records

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Financial Statements Having a solid up-to-date accounting system that

provides good management information by which you can measure performance is critical to your success!

We will briefly discuss, but strongly urge that you take additional classes to become comfortable with this information and how it can help you.

Why?– Information will help establish future goals– Allows you to measure performance/profitability/cash needs– Can help you detect problems early– Can help determine future cash needs/funding requirements

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Two Types Of Accounting

Accrual– Recognize income at the time of sale which is not

necessarily when income is received (think selling on credit)

– Recognize expense at the time expense is incurred which is not necessarily when it is paid (think buying on credit)

Cash– Recognize income when received and expenses when

paid

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Benefits

Accrual accounting allows you to match expenses and income allowing you to understand the true profit picture of your business. Balance Sheet and Income Statement

Cash accounting allows you to accurately monitor the cash position of your business and your ability to meet financial obligations. Cash Flow Statement

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Types Of Financial Statements

Types– Balance Sheet — a snapshot of the business’ financial health at

a particular point in time — tells you whether your losing or making money

– Income (Profit and Loss) statement — how your doing over a period of time

– Cash Flow statement — the life blood of the business — measures your ability to pay bills

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Balance SheetBalance Sheet Year 1 Year 2Assets:Current Assets: Cash 38,689$ $70,522 Inventory $60,000 $60,000 Receivables 0 0Total Current Assets: $98,689 $130,522

Prepaid Assets $20,000 $20,000 Accumlated Amortization ($2,857) ($5,714)Net Prepaid Assets $17,143 $14,286

Fixed Assets Furniture & Fixtures 40,000 40,000 Computer Equipment 14,000 14,000 Accum Deprec. (12,000) (24,000) Total Fixed Assets: 42,000 30,000

Total Assets: $157,832 $174,808

Liabilities:Current Liabilities Accounts Payable - - Accrued Payroll - - Total Current Liabilities: - -

Total Long-term Liabilities: SBA Loan 96,885 63,519 Other Liabilities - - Total Liabilities: 96,885 63,519

Equity: Retained Earnings 28,081$ 78,423$ Stock $32,866 $32,866Total Equity $60,947 $111,289Total Liabilities & Equity $157,832 $174,808

A snapshot of finances at a particular point in time

Shows how assets/liabilities are allocated

Generates an Owner’s Equity figure

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Income Statement Match income and

expenses for a specific period

Cash and non-cash items

Income Statement Year 1 Year 2Seasonality Factor

Net Sales 806,075 976,000Cost of Goods Sold 427,220 517,280Gross Profit 378,855 458,720Gross Profit % 47.0% 47.0%

ExpensesEmployee Wages/Salary 83,026 100,528Payroll tax 12,897 15,616Workman's Comp 8,867 10,736Health Insurance 0 0Liability Insurance 3,950 4,819Utilities (Gas, Electric, etc.) 27,500 33,550Telephone 6,000 7,320Rent 73,531 73,531Supplies 9,600 11,712Advertising 11,950 14,579Accounting Serv 2,100 2,562Personnell Benfits 4,000 4,880Repair/Maint/Copnst 8,000 9,760Janitorial Service 2,000 2,440Customer Discounts 10,680 12,932Travel 2,000 2,440Debit Card/Bank Charges 4,732 5,460Freight 40,304 48,800Miscellaneous 6,000 7,320 Total Operating Expenses 317,137 368,985 EBITDA 61,718 89,735Depreciation 12,000 12,000Interest 9,989 8,778 Profit (Loss) before Tax 39,729 68,957 Annual State Taxes 3,259 5,843Annual Federal Taxes 5,531 9,915 Net Profit (after tax) 30,939$ 53,199$

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Financial Analysis

You can use your information to measure yourself against similar businesses– Create ratio to assess things like . . .

• How quickly inventory is moving• How quickly people are paying you• Your financial liquidity to pay obligations

– Paying attention to problem areas can help free up cash and reduce cash needs

RMA (Risk Management Association)– Data useful in assessing your performance against

business of your type/size

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Cash Flow Different from profit and loss — measures only

cash inflows and outflows

Lack of cash is the leading causes of business failure

Small business owners must monitor and optimize cash flow constantly

Steps to improve cash flow– Bill customers ASAP– Establish strict payment policies (e.g., 2%/10 Net 30)– Be vigilant in contacting overdue customers

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More On Cash Flow Cash is generated into a

business through:– Receipt of cash generated as a

result of sales– Loans or owner investment– Asset sales

Cash flows out of a business through:

– Payment of business expenses– Loan payments or owner

withdrawals– Asset purchases

Next week, we will focus explore an example of this important tool!!!!!!!

Cash Flow Statement Year 1 Year 2Beginning Cash $169,328 $38,689 EBITDA 61,718 89,735Less Start-up Costs Store Investment 127,000 0 Lease Deposit 7,000 0 Landlord Improvement 5,000 0 Less Interest Exp 9,989 8,778 Less Capital Exp. 0 0 Less Loan Amort. 34,577 33,366 Less Taxes 8,790 15,758Ending Cash 38,689$ 70,522$

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Financial Summary

Critical . . . not just important . . . critical to your success!

Remember . . . garbage in/garbage out

Get your books and records set up early and right

Hire a professional whenever possible

Not just for taxes

Keep information up to date, learn what it means, understand how it

can help you.!47

Payment Processing Options Credit Card Processing/Processing

Systems– “Acquirer” (a bank) collects credit card transaction

from your credit card terminal or POS system– Transactions electronically transferred to two

primary associations of banks (Visa and MasterCard)– Association collects funds from the credit card

holders issuing bank•Typical merchant fee of 2-3%•Typical processing time to transfer funds is 2

days – Understand all fees, make sure system fits your

needs

Rapidly evolving hardware and technologies (e.g., square reader; near-field communications using smart phones)

–E-Payment Service fees higher 2.5 – 5.5%

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For Next Week . . .

Review and refine:– Mission Statement– Customer Profile– Product/Service Definition– Competition/Competitive Advantage

Become familiar with the following resources– www.sba.gov– www.business.ca.gov– http://www.irsvideos.gov/virtualworkshop/– Add Local SBDC Website here!

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PANEL DISCUSSION