Business Techniques in Troubled Times

Promotional Readiness — Ready to Launch?

by Tom Gray | on May 15, 2013 |  Comments

Success in launching a promotion or a new product is all about lists. In a perfect world, you would foresee every way this new move could affect your customers and your operations, make a list of these issues, and have solutions ready to go. This avoids embarrassing and expensive discoveries after publicizing your initiative. Call it “operational readiness” or “promotional readiness.”

For example:

  • You thought to write down a return policy, but forgot to set up the process to handle the return.
  • You find out customers are looking for a user manual, but you didn’t think they would need one.
  • Your publicity omits a key contact method: phone or email
  • Your order or billing system does not recognize the new product code

Of course, the promotion or new product won’t succeed if the target customers don’t know about it. One client was considering giving a free fourth visit after a client had made and kept three appointments: four for the price of three. When asked about how long it would take to get ready to do so, he said, “Don’t I just have to put up a sign in the reception area?”

Obviously he needed to inform the appointment makers and the billing people, but he also needed to send out the word to his customer list — everyone he wanted to make new appointments. The sign would inform only those already coming in, but his goal was to trigger appointments from inactive previous customers.

Involve Everyone: The Launch Team

Your employees know their jobs better than anyone else, and they know what customers ask for. To foresee everything, you need to involve everyone, or at least every department. If you are using departmental representatives, then they need to get the input of everyone in their department. Your company has the necessary knowledge, but it’s up to you to draw it out.

The organizational technique is to form a team and make them responsible for successful launch. Make it an honor to be on the team – select members for their knowledge, communication ability, and organized thinking. Offer a bonus if all goes well.

Team members should represent all the functions of the business: marketing, sales, installation and repair, customer service, logistics, production, purchasing, engineering, IT, HR/training, facilities management, finance, logistics, legal and perhaps others. Whether the business is large or small, the steps and the functional areas are the same, even if one person does many of the functions.

How the Team Works

The Marketing person usually chairs the team.

Step One: In the kickoff meeting, it’s the marketing person’s job to explain the new initiative and its goals.

Step Two: Then all the team members make a list of what needs to be done to meet their department’s needs. After discussions in the first (explanatory) meeting, they go back to their desks and make a list of what needs to be done or provided for their group. Then they get the comments of their co-workers in that department, and take the revised list to the next team meeting where they explain it all.

Step Three: In the second team meeting, each team member explains each of the items on their list to the rest of the team.

Step Four: After that meeting, the chair assembles a master list, eliminating duplicate items, and putting them all into a sequence. For example, system changes must be completed before training can be done. This master list is given to the team members before the next meeting, so they have time to consider how to improve it.

Step Five: In its third meeting, the team comments on the master list and sequence. Then the tasks are assigned with estimated due dates.

Step Six: While tasks are being completed, the chair revises the timeline or project plan. The chair monitors progress and intervenes to solve roadblocks and assure cooperation. It may be wise to keep an issues list, where resolutions can be written as well.

Step Seven: There may be progress-checking meetings, but the final meeting will be the one where every department “signs off” that all their work is done, and that everyone else has done the work the department needs.

Step Eight: Implement the pre-launch schedule. For example, confirm the launch date, notify employees and union, post new signage, etc.

Step Nine: Announce! This is the launch!

Successful companies not only have good ideas – they also pay careful attention to planning how to launch those ideas. Edison’s famous phrase is “10% inspiration; 90% perspiration.” Sweating these details is critical to successful growth!

Nobody is perfect. There may still be some post-launch surprises. But pre-launch readiness efforts minimize the cost and embarrassment of post-launch adjustments. They are the difference between minor tweaks and scrambling to save the program.

Post a comment to share your experiences with pre-launch planning with our readers!

Thomas H. Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.  For Tom’s new book Business Techniques in Troubled Times: A Toolbox for Small Business Success, see http://www.businesstechniquesbook.com/

PrintFriendly and PDFPrint Friendly

The Three R’s for Developing New Products

by Tom Gray | on May 08, 2013 |  Comments

Flying blind into the marketplace can produce some nasty collisions. How can you learn enough about your product’s market, so you can make smart decisions about whether to spend more money to launch that new product?

The 3R mantra is “Research Reduces Risk.” Market research is not reserved for big companies, and it needn’t have to cost much if you use the Wisconsin Innovation Service Center at UW-Whitewater (Wisconsin Innovation Service Center). It’s not limited to Wisconsin residents, and get great reviews from entrepreneurs and inventors.

What can you get from WISC? First, you get confidentiality. Second, you get professional analysis of your product and its customers, distributors, licensors, and competitors to open your eyes to the real market you’ll be entering. Third, you get credibility: these outside analyses make you and your product more credible to lenders and investors.

Like any savvy marketer, WISC has packaged its capabilities into a few service packages directed to specific needs of entrepreneurs and inventors.

  • New Product Development Assessment
  • Competitive Intelligence Report
  • Customer Assessment
  • Distributor Assessment
  • Product Licensing Partner Search

The “umbrella service” is the New Product Development Assessment. This combines a technical feasibility estimate, an assessment of competition, a preliminary patent search, plus an estimate of market demand and market trends. The price is $895. For a physical product, you’ll want to have a prototype available.

You may decide to have WISC do deeper analysis of selected issues after reviewing the findings in the New Product Development Assessment. This work is customized for your needs, so there is no fixed price.

In the Competitive Intelligence Report, you’ll work with WISC to identify the types of potential competitors. Then WISC researches databases to identify companies fitting your criteria. WISC works with you to develop a questionnaire, and then performs phone interviews with all the selected companies (20 or more). WISC then assesses the results with industry experts, and prepares a competitor matrix. Its summary report includes suggested next steps.

In the Customer or Market Assessment, you’ll work with WISC to identify potential customers and develop an interview questionnaire. WISC performs the survey and summarizes results into a report you can use to modify your product or marketing plans from positioning to pricing to promotion.

In the Distributor Assessment, you work with WISC to identify potential distributors and prepare in interview questionnaire, and then WISC conducts the survey and summarizes the findings. You can use this to validate your sales forecast, logistics, and pricing.

In a Product Licensing Partner Search, you work with WISC to identify potential licensors and develop a survey as above. WISC conducts the survey and summarizes results. WISC may also develop and carry out a 30-90 day plan to decide if a licensing strategy is right for your product.

You decide what you need and when you need it. WISC provides the expertise to find the players and interview them. Together you figure out how to use the findings.

Low cost advice can be an eye-opener without breaking the bank! “Research Reduces Risk,” and that’s why it add credibility at the same time. Check out WISC to get real world direction for your new product design and marketing.

Thomas H. Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.  For Tom’s new book Business Techniques in Troubled Times: A Toolbox for Small Business Success, see http://www.businesstechniquesbook.com/

PrintFriendly and PDFPrint Friendly

Growth Techniques Summary

by Tom Gray | on May 01, 2013 |  Comments

Every business wants to grow, and that means grow profits. Maybe we want to change the world as well, or at least make it better, but even then we need profit to keep doing so. More profit is better. Here is a summary of ten prior articles examining techniques for growth. Which ones work best for you?

1.      Profit Assessment: Is My Business Worth Doing?

How much are you putting into your business, and what are you getting out of it in return? Could you get the same profit from another activity with less effort or risk?

2.      The Business Growth Machine

Imagine yourself as the operator of a business growth machine, with dials to show changes in key business results, and lots of levers that enable you to cause those changes. You are the “great and powerful Oz” – the small business owner! Which levers should you pull first, and when will the results change?

3.      Business Growth Techniques: Fast or Slow

As you decide which lever to use to grow your business, you’ll be thinking about what could go wrong as well as dreaming about success. You do want some noticeable gains soon. You don’t want a major effort for a minor or temporary gain. You don’t want a major risk if smaller steps can deliver the same value. Let’s consider first the idea of “noticeable gains soon.”

4.      Grow Quick with “Quick Wins”

The ideal business growth project delivers higher cash flow within 30 days. The increase is sustainable for months to come, it can be done within current resources, and you can stop it easily if it does not work out. If it’s ideal, it also generates more customer loyalty and better employee morale. Does that sound like heaven on earth? It’s a quick win. Where can you find one?

5.      Grow Pretty Fast With Current Customers

Why are current customers a “pretty fast” growth opportunity? You know how to reach them, and you can be fairly sure they will pay attention when you communicate. You know what products, features, and services they like. You know where they like to buy, and how much they normally spend. More knowns means less risk, and less time required for trial and error marketing. Your relationship with these customers offers more “control” than trying to reach new customers.

6.      Serious Growth Efforts: To Attract New Customers, Change Something!

Attracting new customers in your same target market is not just a communications challenge. A little “reinventing yourself” is needed! After all, you’ve been operating in their neighborhood for years, but they haven’t chosen you! Why not? How are they meeting their needs without you? Did your message not reach them, or did they hear it but decide not to be interested?

7.      Serious Growth: How to Choose a New Target Segment

Attracting new customers in your current geographic market need not be “more of the same.” You can expand your customer base by appealing to customer groups who did not realize that your product could be their solution. These groups are also called “market segments.” They are a group who all face a common need. This article homes in on how to identify promising segments for targeting.

8.      Growing with New Distributors and Collectors

Previous articles explained how to attract a new distributor in the classic sense – a wholesaler, a reseller, one who sells to retail shops for you. See Finding Distributors. But you can interpret the word distributor more broadly.  You are looking for situations where you can build one relationship to generate multiple customers. Imagine you are seeking “collectors.”

9.      Major Growth Effort: Choosing and Entering a New Geographic Market

New markets and new products are major growth efforts. Which do you think is less easier: entering a new market like the one you are serving today, or developing and introducing a new product to your current market? New similar markets are easier than new product introductions because you already have a successful recipe for your market. Now you can grow by replicating it where conditions are similar. Replicating is easier than creating!

10.     Major Growth Effort: New Product

If you are doing more than merely adding a flavor or a feature to current products, new product development is probably the most complex growth activity you can find. Why? Because you are re-assessing everything that makes your company work, and changing many parts of it. You’ll certainly change marketing, operations, and supply chain. You might also change organization, technology platform, and financing. Complexity takes time and adds risk. To increase chances for success, the business must reduce complexity. This article addresses new product development and introduction for your current geographic market. If the target is your current customers rather than a new segment of your home market, the risk is reduced even further.

Your business growth machine has many levers. Start with “quick wins,” then develop more revenue from current customers. To attract new customers, target a new segment and change something! Develop relationships with distributors and “collectors.” When moving to new markets, find similar areas, and grow in concentric circles. New products can be the most complex effort, so use a system to select the best ideas, focus your resources, test frequently, and don’t be afraid to say “no go!”

 

Thomas H. Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.  For Tom’s new book Business Techniques in Troubled Times: A Toolbox for Small Business Success, see http://www.businesstechniquesbook.com/

PrintFriendly and PDFPrint Friendly

Major Growth Effort: New Product

by Tom Gray | on Apr 24, 2013 |  Comments

The top companies earn 50% of their revenues from products introduced in the past five years.* New products not only enable growth – they also keep a business fresh and competitive. Here’s the vision: change and grow, or wither and die.

But new products are a major effort. If you are doing more than merely adding a flavor or a feature to current products, new product development is probably the most complex growth activity you can find. Why? Because you are re-assessing everything that makes your company work, and changing many parts of it. You’ll certainly change marketing, operations, and supply chain. You might also change organization, technology platform, and financing. Complexity takes time and adds risk. Frightened yet?

To increase chances for success, the business must reduce complexity. The riskiest move is to introduce a new product into a new market, because the two new challenges (both product and market) seem to quadruple the complexity and risk of failure. Most small businesses are smart enough to want to do that only once – at startup!

So this article addresses new product development and introduction for your current geographic market. If the target is your current customers rather than a new segment of your home market, the risk is reduced even further.

New Product Development has three parts:

  • Strategy: what do our customers want, that we could do differently than others, to deliver for better value for customers?
  • The process itself: fleshing out the details, while testing ideas for strategic fit, customer acceptance, feasibility, and profitability along the way
  • Implementation and integration

Before we start, consider two characteristics of the most successful new product processes.

  • The best process uses a team, representing all the key functions of the business. This avoids nasty surprises as you get closer to launch, and builds morale as well.
  • Plan ahead for the ability to launch multiplenew products over time. This keeps your company in the forefront, and builds a growth engine.
    • To do so, envision a platform that can support several new products, and manage to a product roadmap so you know which products for which markets are coming next. See Product Strategy: Product Roadmap.

Start with Strategy

First figure out where you are. Ask yourself and your team: what kind of company are we, who do we serve, what differentiation makes them want to buy from us, and what are the trends we and our competitors face?

Then ask what kind of company do we want to become? Establish a vision for three years in the future. Define it in a multi-faceted way, so you know what to manage toward. See “Imagining Excellence”: A Technique for Vision Development.

Describe the “platform” of technology and capabilities we will have then. What customers and product families can we use it to serve? How will we get the resources to do that?

Now that we know where we are going, we can consider products to get us there. This also means we will reject products that take us elsewhere. Call this “strategic fit.”

The New Product Development Process

Trial and error has led to a fairly well-developed set of models for new product development, designed to balance the cost and risk of failure with the opportunity for successful growth. All the models have stages, separated by gates. The gates are go/no go decision points, to decide if the idea deserves more resources for further development. These gates minimize wasting resources on ideas likely to fall short of the target criteria for success. These might be market acceptance, size of market, production feasibility, and profit.

Eight stages describe the process. There are “go/no go” decisions, or gates, after stages 2, 4, 5, and 6.

  1. Ideation: brainstorming ideas
  2. Idea screening, to identify the ideas with the best potential and strategic fit. What are your criteria to accept an idea for more development? You must be willing to use the same criteria to reject ideas. You cannot chase tangents with your limited resources!
  3. Concept development and market research is next. This stage estimates the marketing and operational requirements, and tests the idea with potential customers. Some prefer to skip the market research, but doing so adds risk. What if customers don’t see the magic like you do?
  4. Now it’s time for some numbers. The business case stage writes it all down and estimates resources needed and profits expected. This becomes the standard for measuring success.
  5. Follows a “go” decision on the business case, the next stage is detailed design, prototype, and market testing. Here is where you see if you can really do it, and whether people will buy it. Usually this process results in a list of changes needed!
  6. If the market test has good results, the company will spend the resources to make it happen. This involves most of the organization’s functions, so the team must include a representative from each. Functional areas include production specifications, technical or software changes, manufacturing training and test runs, field operations procedures and training (e.g. retail, sales force,  and installation/maintenance), and value chain readiness: suppliers and distributors.
  7. Finally it’s time for the Launch stage. Logistics, marketing, and training issues dominate here.
  8. Tracking follows launch. What worked and what didn’t? Are we meeting objectives from the business case? Why not? When you learn from your mistakes you can improve not only the product, but the whole process as well. This reduces risk with the next new product.

New Product Implementation and Integration

The launch usually involves compromises and shortcuts to meet a target date, as the best-laid plans are frustrated by the real world. This last part of the effort may involve several months of feverish work to smoothly integrate production and marketing into the whole company’s ways of working.

The risks are high, but so is the opportunity. It won’t happen fast. This step-by-step process has the best chance of managing the complexity, using resources most effectively on the best ideas.

Help our readers! Did you find a quicker way? Were you smart, or just lucky?

*Source: Jay Heizer and Barry Render, Operations Management, Prentice Hall, 2011, page 157-8.

Thomas H. Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.  For Tom’s new book Business Techniques in Troubled Times: A Toolbox for Small Business Success, see http://www.businesstechniquesbook.com/

PrintFriendly and PDFPrint Friendly

Major Growth Effort: Choosing and Entering a New Geographic Market

by Tom Gray | on Apr 17, 2013 |  Comments

New markets and new products are major growth efforts. Which do you think is easier: entering a new market like the one you are serving today, or developing and introducing a new product to your current market?

The answer probably depends on “how new?” Is the new market is very similar to your current customers? Is the new product a simple variation on the old products, and useful to your current customers? Both of these are easier than a very different market or a very different product. But both are harder than quick wins, more sales to current customers, and gaining new customers in your current market.

This article assumes that selling current products to a new but similar market is the easiest of these major growth levers. As always, the reason is reduced complexity and greater control. New similar markets are easier than new product introductions because you already have a successful recipe for your market. Now you can grow by replicating it where conditions are similar. Replicating is easier than creating!

Before you start, think strategically for a moment. You should be looking for not just one new market. Your goal should be a repeatable path to market penetration: entering several new markets successively, one after the other, using learnings from one to do better in the next. For most small businesses, the vision will be concentric circles around the original market area.

How Similar is that New Market?

The big mistakes and losses happen when you assume the new market is similar, but it has some key differences you did not plan for. Before even considering which new market to attack, take a few minutes to write down the characteristics of your current market. Some questions to help are:

  1. Demographics: age and income distribution, housing, education, literacy etc.
  2. Customer types: anchor customers (e.g. universities), key industries, social groups
  3. Regulatory requirements: important if entering another state

Note: this article will not address entering markets in other countries

  1. Competition: who competes with you; on what basis do they compete (price, quality, accessibility, etc.); how intense is the competition?
  2. Media outlets: which ones are available; which ones are most useful; what is their cost?
  3. Local cost structure: rent; shipping; labor; are the skills you need available?
  4. Supply chain cost: shipping cost and timing?
  5. Climate, seasonality, and customs: when do your customers buy, and for what seasonal purpose?

Choosing Which New Market

Assuming concentric circles, you can choose several nearby towns as potential expansion targets. Now assess them for similarity. One technique is “Factor Rating”. Set up a table with column one being the 8 factors above, with a column to the right for each potential new market area. Enter a rating of 1 to 5 in each box, with 5 being most similar to the home market. Then you can sum each column to find the most similar new town. The table might look like this:

Factor

Town   1

Town   2

Town   3

Town   4

Town   5
Demography

3

4

2

3

4
Cust. Types

4

3

5

4

3
Competition

5

1

2

5

2
Media

2

1

3

4

5
Local Costs

5

3

1

4

5
Seasonality

1

2

5

3

3
Total

20

14

18

23

22

After considering the totals, you may decide to weight each factor with a percentage, perhaps using 20% for seasonality and 80% for customer types. This would obviously result in a different set of totals for comparing similarity of the towns to your home market.

Similarity is valuable to reduce the complexity of your entry, but there are a few other success considerations.

  • The new market must be large enough to meet your goals without assuming unreasonable market share.
  • Ideally, the new market should be facing some turmoil that makes people open-minded enough to consider new solutions from a new entrant.
  • You should know the identity of a few key customers you expect to capture at the outset. This “foothold” will generate testimonials, referrals, and examples to provide the credibility that every new entrant needs.
  • Supervision risk and cost: Do you know the manager you can use for the new market? Are there significant costs for transporting managers between the home office and the new market (airfare, lodging, car rental)?

You could do another factor rating table with these five rows: similarity, size, turmoil, foothold, supervision. For this one, weighting each factor is a must! Similarity gets the highest weight. Perhaps turmoil gets the lowest.

One word to the wise: do not fall in love with a particular new market because you found an ideal location there. A great location in a bad market will not grow your business. Pick the market first, and then explore locations.

Most likely, you chose the new market for similarity, proximity, and profitability.

How to Penetrate the New Market

In addition to operational considerations, you will need a localized marketing plan and a localized message.

The marketing plan will adapt your price, location, and communications to the local competitive and media situation. The launch will be important. Referrals and anchor customers (“foothold”) will be key objectives. Referral sources include the landlord, your vendors, distributors if you use them, and local “collectors” as described in Growing with New Distributors and Collectors | Thomas H. Gray. Of course, there must be a marketing budget and a sales forecast.

The message for the new market will be a little different, because it is pitched to the early adopters. These are the pioneers who will be the first to use your solutions. In addition to product information, the focus must be winning credibility. Tools include introductory offers, videos showing people like your target market, and testimonials from the home market until you can gather some locally.

Help our readers! What is your experience with penetrating a new market?

Acknowledgement: Some of the information in this article was drawn from Find and Enter New Markets

Thomas H. Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.  For Tom’s new book Business Techniques in Troubled Times: A Toolbox for Small Business Success, see http://www.businesstechniquesbook.com/

PrintFriendly and PDFPrint Friendly

Need a Toolbox of Small Business Techniques?

by Tom Gray | on Apr 17, 2013 |  Comments

A new book offers more than 70 practical ways for small businesses to grow their customers and profits. Run into a new problem? Jump directly to a topic to find a proven solution, explained step-by-step. Return to the book again and again for just the right management technique, like pulling the right screwdriver from your toolbox.

Business Techniques in Troubled Times: A Toolbox for Small Business Success by Thomas H. Gray is a how-to-do-it book for small business owners searching for a trustworthy outside perspective, from planning to marketing to exit. It tells you how to do things: set a price, qualify for a loan, improve your processes, and so on. For more details, excerpts, and reviews, see http://www.businesstechniquesbook.com/

Tired of vague cheerful exhortations when you’re really looking for techniques to solve a problem? Here is a handy collection of bite-size solutions, distilled from decades of experience with dozens of companies.

Use this book to

  • Secure your competitive position
  • Create your business plan
  • Get financing
  • Choose the best pricing
  • Advertise effectively
  • Motivate salespeople with focused compensation
  • Improve profits by improved processes
  • Analyze and control your margins and cash flow
  • And more

This book is especially timely because small businesses produce most of America’s new jobs, and jobs are the one of the biggest issues facing our country today.

After three years, half the new sole proprietorships are out of business. New corporations, usually LLCs or S corporations, do better, with a 50% survival rate after five years. A third still operate after ten years, and a quarter survive at least fifteen years.

Why is the attrition rate so high for small businesses? Maybe it’s because they lack the cash to support the business until it is self-supporting. Maybe it’s because their business planning was incomplete or too optimistic. Poor management decisions could also play a role: pricing too low, family employees without the best skills, too much debt, and so on.

Based on Gray’s weekly blog articles for the past year, the book is designed for “hands-on” owner-managers. It puts effective tools in willing hands. The articles are practical, focusing on how to use the technique to satisfy customers and improve profits.

At last! Practical techniques – clearly explained – proven by experience. “America needs this book!”

Click here and order yours today.

 

Thomas H. Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.  For Tom’s new book Business Techniques in Troubled Times: A Toolbox for Small Business Success, see http://www.businesstechniquesbook.com/

PrintFriendly and PDFPrint Friendly

Growing with New Distributors and Collectors

by Tom Gray | on Apr 10, 2013 |  Comments

Previous articles explained how to attract a new distributor in the classic sense – a wholesaler, a reseller, one who sells to retail shops for you. See Finding Distributors.

But you can interpret the word distributor more broadly.  You are looking for situations where you can build one relationship to generate multiple customers. Imagine you are seeking “collectors.” For example,

  • A medical practice could attract an independent contractor who brings their own patient base and shares the overhead. That other doctor has already collected his or her patients.
  • The same medical practice could become part of another insurance company’s preferred provider list. That insurance plan has already collected its members.
  • You could build a relationship with a community organization, a church, a fitness center, a team or league, an industry association, a school etc.

All these groups have their own participants. When you are accepted by the organization, you can reach, or be presented to, their members or users.

Your website, blog, Facebook Business Page, and Twitter community are other distribution channels – each enables you to reach multiple prospects by building one capability.

The power of these relationships to generate multiple customers makes them worth an investment in time, personal effort, and financial consideration. This could include discounted prices for resale, commissions, donations, membership fees, and of course the cost/effort to make your website one of the best.

Forming Relationships with “Collectors”

Regarding social media, advice is everywhere. You can even review my two blog articles Tips for Your Website and Tips for Using Social Media to Market Your Business. Key points are: organize the website by type of user; offer valuable information in your social media communications; “repurpose” your content into different social media; build your audience by participating in discussions and blogs.

Regarding other collectors, use a three-step process. Start with your own internal analysis, move out to research, and then reach out with personal contact.

First, decide what you want and what you are willing to pay for it

  • You want:
    • Access to their members: list of email addresses; publication/website for advertising.
    • Opportunity for personal presence, such as participation in an event, speaking engagement, sponsorship, or posting your articles on their website or blog.
    • Status as a preferred provider, such as an endorsement.
  • In addition to your time and expertise, you should expect to offer:
    • Fee to join the association
    • Sponsorship costs
    • Event entry fees or booth fees
    • Pay for each use of the member list for email
    • Pay for ad in website or publication
    • Possibly, a referral fee or sales commission or donation

Second, do a little research to identify a list of potential collectors, and then prioritize them:

  • Are they local enough?
  • Are they large enough in your local area?
  • Do they seem to already have a relationship with a competitor

Third, arrange a face-to-face chat, or at least a phone conversation. Face-to-face is best, because you are building a relationship that depends on your own attractiveness to them! In addition to verifying your research, you’ll want to know

  • Are they willing to meet your needs? How strong would any recommendation be?
  • What would they want from you?

Serious Efforts Take Serious Time

New relationships are a courtship. This is not speed-dating! You must choose the target, get to know them, modify your offer, and then find a way for them to get to know you. Expect to take three to twelve months to see the results. New distributors and collectors will take longer than new customers, but the multiplier effect of makes it worthwhile.

Help our readers! Share your story – how long did it take you?

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

PrintFriendly and PDFPrint Friendly

Serious Growth: How to Choose a New Target Segment

by Tom Gray | on Apr 03, 2013 |  Comments

Attracting new customers in your current geographic market need not be “more of the same.” You can expand your customer base by appealing to customer groups who did not realize that your product could be their solution. These groups are also called “market segments.” They are a group who all face a common need.

Serious Growth Efforts: To Attract New Customers, Change Something! suggested growing by targeting a series of new segments successively, one at a time. That article focused on how to modify your offer to appeal to new groups. This article homes in on how to identify promising segments for targeting.

Why bother with segments? Why not pursue the opportunity of the moment, one that just walked in the door, or that just occurred to the owner? Why not chase personal pet projects without comparing them to other possibilities in terms of their value to the business long-term?

You know the answer. It’s about focus. Your resources – time, money, staff – are limited. If you spread them thinly across minor opportunities, your wins will be irrelevant to long-term success. If you spread them across major opportunities, they will be inadequate to succeed. If you focus your resources, you can make a difference. This holds true for business, politics, war, education, and every other endeavor in our world.

Identifying a Potential Market Segment

A segment is a “specific type of customer facing a particular circumstance.” They have potential value to your business if you can describe that circumstance and how your solution is better. Use these questions to prompt your description:

  • What situation do they find challenging?
  • Do they believe existing solutions over-serve, offering options that are too expensive or hard to use?
  • What trade-offs are they making when assessing potential solutions (which frequently include doing nothing)? How well do these solutions rate along a wide variety of performance criteria?
  • What gets in the way of achieving excellent performance today? This may have little to do with a product or service in itself, but be more about the context in      which it is used.
  • What is the value that excellent performance would create?
  • Does the company have assets (such as a brand, sales force, or intellectual property) that would give it unique advantages in serving these customers?

Source: Find and Enter New Markets

Choosing an Attractive Segment

A segment can be attractive if it is big enough to make a difference for your business, you can sustain the value of your solution despite likely competitor reactions, and you can find a way to be heard amid the clutter.

  • Can you quantify the number of these types of customers? You need to know if the segment size is worth pursuing.
  • Do trends indicate this group is growing, not shrinking?
  • Are competitors are unlikely to respond with offers as good as yours from better-known brands?
  • Can you imagine an affordable way to communicate with them about your solution and your company?
  • Can you quickly find some “foothold” customers in the new segment, who can provide testimonials to attract others?

Technology-Based Approach

“Sometimes, a company needs to start from a different place – it has a unique technology and is seeking where to best deploy it or how to generate usage. In those situations, [the] questions would center on the unique attributes of the technology, who would find those attributes most useful, what constrains their consumption, what value the technology would create for customers, and what elements of the business model could be most powerful in unleashing growth. [Be especially conscious of finding] “footholds” – small groups of customers that would readily adopt a technology, prove its utility, and serve as beacons to broader numbers of customers in the future.” Source: Find and Enter New Markets.

Serious Efforts Take Serious Time

New relationships are a courtship. This is not speed-dating! You must choose the target, get to know them, modify your offer, and then find a way for them to get to know you. Expect to take three to twelve months to see the results.

Help our readers! Share your story – how long did it take you to penetrate a new segment?

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

PrintFriendly and PDFPrint Friendly

Serious Growth Efforts: To Attract New Customers, Change Something!

by Tom Gray | on Mar 24, 2013 |  Comments

Attracting new customers in your same target market is not just a communications challenge. A little “reinventing yourself” is needed! After all, you’ve been operating in their neighborhood for years, but they haven’t chosen you! Why not? How are they meeting their needs without you? Did your message not reach them, or did they hear it but decide not to be interested?

You don’t control these growth levers like you control your price and your costs. You don’t have a relationship with these prospects, so you cannot build on it as if they were current customers. You cannot make these folks want to do business with you. Instead, you must first get them to notice you, and then get them to appreciate the benefits of your offer. This courtship takes time, perhaps three to twelve months. It’s a serious effort!

First, Find Out Why

First you need to know why they haven’t bought from you already. Do some research:

  • Are they aware of your company? If not, how do you reach them?
    • What media do they use? How could your offer stand out in that media?
    • What search arguments would they enter into Google? Do your site’s “keywords” match what they would enter?
  • Are they aware but not interested? Why not? Do they not feel the need for your solution, or do they feel the need but believe another provider has a better offer?
    • Maybe they feel that buying from you is riskier than continuing to use their current provider.

Second, Change Something!

If they have not bought thus far, whatever you are doing is not working for them. Don’t expect different results from doing more of the same thing!

  • Is your offer different enough to make them want to start solving their problem, or switch solution providers?
    • Consider your differentiation, your benefits statement (positioning), your product offer, your pricing, your accessibility, and your communications of all these.
    • Remember that your benefits statement or positioning addresses the value to the customer of your solution. Express it in customer value terms.
      • For example, “a customer might say ‘I want to protect my family if I die, but my financial circumstances change a lot and I need flexibility.’ Few customers would say ‘I need a universal life policy with a no lapse guarantee rider.’ Source: Find and Enter New Markets
    • One technique is to select a subset of prospects who share the same need/application of your product (“segment”), and target all the changes at them. For example, a special offer for seniors, or families with students, or people with older homes. You could address one new segment every six months. For more, see below.
  • Once you have a great offer, consider your credibility. Why should they take the risk of dealing with a new provider?
    • Build your credibility with a guarantee, testimonials, referrals, free or discounted samples, trials and introductory offers, and being visible helping people in your market area.
    • Visibility tactics include press releases, participation in community associations and their events, and local sponsorships. These build networks and relationships. It’s just natural to feel that “the company I know is less risky than one I don’t know.”
  • The final step to get them to listen is (naturally) communications.
    • Find out what media they pay attention to, and when, and be there then.
    • Make your message stand out from the clutter. Deliver the message using a person they can identify with, solving a problem they share. Use color. Use the Web. Engage them with something interactive, like a free online evaluation, a contest, a video, or humor.
    • Invite a response. Your message must include a call to action. A limited time offer is a  good trigger, but it must motivate them to take some kind of action: call, reply mail, email, website visit, free consultation, etc.
  • The final step to get them to buy is their experience when they reach out to meet you, come to your shop, visit your website, or call for information.
    • Take special care to design this experience especially for the new customer with that special need. Design the process and the tools, and train your people to use them well.
    • Build in a feedback loop. Ask them what made them decide to try out your company. Store that in your customer database, and tweak your offer and your communications to do more of what works!

Serious Efforts Take Serious Time

New relationships are a courtship. This is not speed-dating! You must choose the target, get to know them, modify your offer, and then find a way for them to get to know you. Expect to take three to twelve months to see the results.

Help our readers! Share your story – how long did it take you?

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

PrintFriendly and PDFPrint Friendly

Grow Pretty Fast With Current Customers

by Tom Gray | on Mar 20, 2013 |  Comments

Why are current customers a “pretty fast” growth opportunity? You know how to reach them, and you can be fairly sure they will pay attention when you communicate. You know what products, features, and services they like. You know where they like to buy, and how much they normally spend. More knowns means less risk, and less time required for trial and error marketing. Your relationship with these customers offers more “control” than trying to reach new customers.

You want current customers to come back and buy again: repeat purchases. You want them to do that more often. And when they buy, you want them to spend more. How can you make that more likely to happen?

First, you need to capture what you know about these people, in a place and form making it easy to use the information. The tools are a customer database, and the reports it generates. For techniques to design the database and some useful reports, see Customer Data Base: The Key to Unlocking Revenue and Using Customer Data Base Reports. Now you can operate the growth levers.

Loyalty Club: More Purchases; Larger Buys

  1. Tighten your relationship by recognizing their value – the Loyalty Club.

Name the club, define the threshold for membership, and create some offers to show the value of joining. Then promote the new opportunity. When they join, make sure you note it in the database, and make sure your staff has an easy way to recognize their special status when they interact with these valuable folks.

2. Design some offers.

Hold an event just for them. Offer them extras, such as free maintenance or consultation using nonproductive staff time. Enable them to earn value by buying more, such as free shipping, volume discounts, one free for every three bought, or special bundles of extra services.

3. Set up a regular stream of tailored communications to remind them of your appreciation.

Retail Merchandising

If you have your own retail location, arrange the store to show high margin products near the front and staples near the back. This way customers see the high margin items going in both directions. Spend time to make the displays attractive. Train your salespeople to ask customers to buy the current special, or a complementary product or service. Make sure their offer is made as a service — not an irritation –to help customers meet their needs.

Bundles of Services

Package your laundry list of features and services into at least three tiers designed for common needs. Price them as good, better best. Research shows most customers will choose more than the basic offer when three choices are present. The result is a larger buy, because you packaged the complementary services they may not have realized they needed until they saw the bundle. See Product Strategy.

The Special Combination

Use your knowledge of how the customers use your product to create a combination of services they cannot find elsewhere in a single offer. This sets you apart from competitors, cements customer loyalty, and brings then back again and again. Feel free to acquire the extra feature(s) from other suppliers or contractors at a discount – these suppliers will often offer you a discount for the extra business and your new relationship.

For example, the roofing contractor also does gutters and adds attic insulation. He employs the gutter crew, but he subcontracts the insulation to another company.

Lower Unit Price for Higher Volume Package

Your basic product represents only a fraction of your costs. The rest of your costs (overhead, marketing, shipping, job setup, some labor, customer service) don’t change with the size of the package. This enables you to sell a larger package for a lower unit price while maintaining good margins. For example, your materials may cost only 25% of revenue, so you can offer a package twice as large as usual for a 50% higher price and still make a 50% profit on the extra revenue.

Temporary Promotion

All promotions are temporary. Find an offer that generates more revenue than the additional variable cost. The resulting sales margin boosts profits.

Hold an Event

An event gives you something special to promote and creates a captive audience for your sales effort. Those attending feel obliged to buy. The result is a temporary boost in cash, as well as an opportunity to identify more loyal customers.

Promotion is the Key Ingredient

Attractive offers without communications are a waste of time and effort. Like the famous tree falling on the forest when no one is nearby, they don’t make a noise that anyone hears. Communications are the key to successful relationships. Your target customers must hear your communications if promotions are to succeed. This challenge is why building current customer sales cannot be a quick win. It is not totally under your control. But it can still be pretty fast, because these people already have a relationship with you, so they should be listening.

Help our readers! How did you build sales with current customers?

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

PrintFriendly and PDFPrint Friendly

Turning Around the Defense Department

by Tom Gray | on Aug 22, 2012 |  Comments

Coordination and cooperation among the armed services creates the image of children wrestling under the bedspread! The Department of Defense nominally supervises the armed services: army, navy, air force. Yet each of these services has its own infrastructure, duplicating the others and requiring another layer above them to try to coordinate these unwilling warriors.

It is obvious to any observer that inter-service rivalry and duplication has been a fact of life for centuries. Under the guise of protecting our freedoms, this organizational swamp takes our money to advance the self-interest of service personnel – their job security and advancement – undermining the interests of the country at large. The result? Over 23,000 people work at the Pentagon, Defense accounts for 25% of the US Budget, yet our military is worn out from ten years of war.

In 2010 the Secretary of Defense directed his staff (the services and their nominal overseers) to “assess how the department is staffed, organized, and operated, with the goal of reducing excess overhead costs.” (see GAO report cited below, page 233).

According to the Government Accounting Office’s 2012 Report to Congress on opportunities to reduce duplication in government (see http://www.gao.gov/assets/590/588818.pdf), DOD does not even know how many people it has in its headquarters organizations, and the system to provide that information will not deliver such a report for FIVE more years! Why rush to provide the information for your own hanging?

Aside from headquarters bloat, the GAO Report cites duplicative programs in DOD in the areas of airborne electronic warfare, drone development, counter-IED efforts, language and cultural training, and humanitarian assistance.

Back in 2003, an officer at the Army War College analyzed the enlisted ranks and found that four of the ten basic “occupational areas” should be removed from the individual service branches and consolidated into a “DOD Support Command.” Not surprisingly, there seems to have been no action taken in this regard! Those who would take such action would see their control and power diminished if they adopted such recommendations, so they don’t.

Above we see three opportunities to improving DOD efficiency:

  • excessive management (i.e. HQ)
  • duplicative programs
  • de-centralized enlisted support groups performing identical functions without benefit of functional expertise and best practices benchmarking.

But we also see that those who should seize the opportunities will not do so, blinded by a lifetime of inter-service rivalry as well as their own self-interest.

 Imagine the different results if the Defense Secretary had asked a turnaround specialist how to reduce excess overhead rather than asking the armed services themselves! Some of the questions might be:

-        Why does each service have (need) its own infrastructure and support groups?

-        How many man-hours are spent on inter-service coordination?

-        How many non-unit support employees are there per front-line trooper?

-        What is the best organizational approach to align self-interest with the country’s interest in efficient and effective defense forces?

Ameritech and other telecom companies faced a similar problem of legacy empires governed by management teams whose self-interest seemed to undermine the corporate interest, and who lacked a sense of urgency to improve their operations and alignment. Ameritech had five 100-year-old state telephone companies to coordinate and optimize. It didn’t work, and it could never work, just as DOD will never be successful in optimizing three or four legacy armed service empires.

The telecom solution, driven by McKinsey, was to re-organize into business units focused on customers (consumer, corporate, carriers), products (cellular), or support/infrastructure functions (network, IT). The issue was “what you do for who” not what state you do it in. The customer/product units had budgets, and ordered infrastructure and support based on what they needed for their mission (their customers). This reversed the company’s power structure – customer units made the decisions, rather than network units. The result was 50% productivity improvement.

In the DOD, the organizing principle could shift from your place of fighting (land, sea, air) to your type of fighting (mission), just as Ameritech shifted from states (place) to customer or product unit (mission). For example, types of fighting might be

-        Special Ops (bin Laden)

-        Small invasion (Grenada)

-        Large invasion (Iraq)

-        Bombing campaign (Serbia)

-        Naval only (Cuban blockade, Paracels?)

-        Strategic (SAC and subs)

-        Non-mission combat readiness

Support functions might include the following units: personnel, procurement, logistics (supplies), health care, base management, transport and vehicles, data processing, law enforcement, intelligence, communications, training, food service, others, and combat operations units. The latter could be organized into larger groups with similar skills, such as infantry, artillery, surface warships, submarines, etc. However, these larger groups would not own any of their own support organizations, AND their budgets would be controlled by the demands or requisitions of the mission planners.

The mission planners would requisition combat operations units and support as appropriate for their mission. Between missions, the combat readiness unit would govern the activities of all support functions including combat operations units.

The traditional branches of armed services would disappear except to support the transition, and to be the interface for making reports to Congress and receiving appropriations until laws are changed to reflect the new military organization. Ameritech did the same thing with its state companies, reducing each of them to a few people who dealt with the state regulatory bodies but had no authority over company operations. This approach enables the DOD to transform itself without waiting for Congressional authorization.

The existing military branches will not commit suicide, yet they are the problem for DOD budget and efficiency. The only route to that goal is to go there without the traditional branches. As we have seen, every other route is a dead-end, failing to reach the goal due to conflicting self-interest, knowingly or not.

So what do you think? Could something along these lines work? What can you offer to improve it? If it won’t work, what is your alternative?

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

PrintFriendly and PDFPrint Friendly

Fixing a Troubled Company: The Detailed Phase

by Tom Gray | on Sep 05, 2012 |  Comments

Our first article on “situation analysis” defined the starting point: a general analysis of the company in terms of Business Model, Profit and Loss Statement, Trends, Competitive Analysis, SWOT, and Owner’s Goals. See Fixing a Troubled Company: Where to Start? | Thomas H. Gray – Consultant, CEO, Director.

The second stage of “situation analysis” looks deeper into how the company tries to make a profit, assessing how well it is performing in those efforts. This enables the third stage, where the analyst and the owner/manager select a course of action.

The Overriding Question

In this deeper look, the overriding question is “Can you make something that enough customers want, and make it better or at lower cost than competitors, so the customer is willing to pay a price that yields enough profit?”

If not, you need to reconsider products and the process for making them: product strategy and production process improvement. Otherwise, if you can make these products that customers find valuable, then the focus will be on getting more such customers: pricing, sales, and marketing communications. For more guidance on these subjects, go to the Category box on this blog, choose one of those topics, and several relevant articles will be displayed.

The Detailed Analysis Stage

We look at the business seven ways to make this detailed situation analysis:

1. Fixed costs or Overhead. These are the costs that do not change regardless of the number of sales and amount of sales revenue, such as rent, utilities, systems costs, machine and (some) maintenance costs, marketing, non-productive employee time, and others.

Usually small business owners have an excellent handle on overhead costs, with the possible exception of non-productive employee time. This is the cost of wages for time not spent working on revenue-producing production. While it includes paid absence, the main issue is paid time when the employee is between jobs (in a job shop). If it is 20%, that’s normal. If it is 40%, that is not good!

Owners may not have quantified this time because they haven’t measured how much time employees spend being productive. If there is no system for tracking hours spent per job, then the owner and the analyst will estimate it by type of job or product. They have to do this anyway for the product profitability analysis (see below).

2. Process Efficiency. The calculation here is the number or value of the outputs (products, subassemblies, or parts) divided by the number or value of the inputs (raw materials, labor hours, other).

For example, a restaurant could measure wait staff productivity in meals served per labor hour. Cooking productivity might be meals revenue per hour divided by the hourly labor cost of the cook plus average cost of the ingredients used per hour.

Once you have an efficiency measurement, you can compare it to industry averages obtained from a trade association, or to best in class operators (“benchmarking”). This tells us how efficient your process is vs. competitors, and it may explain one important reason why your costs are higher than theirs.

Quality is an issue here as well. Your cost measurement should consider the cost of rejects. Perhaps higher quality is a reason to accept higher process costs, but only if customers are willing to pay a premium price for that quality.

3. Product Profitability. Price minus the variable cost of producing the product yields product profitability, called gross margin or contribution margin.

Variable means those costs that do not happen if the product is not produced. These variable costs include raw materials, productive labor hours, any production-related outside contractor costs, plus delivery and sales commission costs. We assume at this point that all labor costs are variable.

If your product profitability is less than 50%, i. e., if price is not double the variable cost, you are likely to have trouble covering your overhead while still making a profit, depending on your industry. The price we use here is the price you charge to the next layer in the value chain. For example, if you sell to distributors, use the price you charge them, not the retail price.

When the company is a “job shop,” making a variety of products customized for each order, the owner will be asked to identify job types rather than products. Usually there will be three: a simple repetitive order, an order of average complexity, and a major customized project.

The product profitability analysis often shows that the price is too low because it does not cover all the hours spent, or does not produce enough margin to cover overhead including non-productive wages.

4. Customer Profitability. Some segments of customers (by type of business, region, age, or some other distinguishing characteristic) simply will not pay enough to yield target profits, for reasons that may include competition, late payments, too many change orders, or too much customization. Other customer segments are your sweet spot: pleased with your quality and willing to pay for it.

Customer profitability should drive your marketing effort. You want to attract more who are in the sweet spot, and decline to serve those who do not yield enough profit.

5. Marketing Program. The Competitive Analysis (see prior article) highlighted your “differentiation.” The Customer Profitability analysis identified your best types of customers.

The marketing program starts with deciding how you want these “best customers” to think of your company/products – your positioning. Maybe it is innovative solutions. Or maybe it is reliability and quality. Whatever it is, your marketing program must then be designed to reinforce this positioning to these types of prospects. Using the famous 4 P’s, ask yourself:

- Can I change the product to fit my positioning better, and to fit better with the needs of these prospects? Should I come up with something new?

- Does my pricing approach support the image I want to have in the minds of these prospects, or should I tweak it? Would they pay a little more? If so, that small price increase can give profits a major boost. See Pricing Tips: Start High; Big Results from Small Changes | Thomas H. Gray.

-  Can they find my product in a place they like to shop, and one that fits my positioning? Should I find new distributors or new retail outlets? Is my web presence all it could be? Am I using social media well? How good is my sales force coverage? Could I improve my sales support? See Finding Distributors | Thomas H. Gray and Sales | Thomas H. Gray.

- Do my communications reach the target customers when they are ready to buy? Are my promotions designed to fit my positioning? Do they get the attention of the target prospects? Do they value my promotions? If not, what should I do differently?

6. Sales Channels. Do I have my sales resources targeted at these highly desirable prospects, or are they going after easy low margin sales? If it’s the latter, how can I change sales force behavior:  compensation plan, management, training, more coverage, use sales agents or distributors, or better sales support?

7. Organization. Do I have my resources aligned to my priorities? Often a small business knows what to do, but is unwilling to hire the expertise to make it happen. They tend to load transformational projects on the shoulders of one or two key managers who are already working more than full-time on day-to-day responsibilities.

In that case, the near-term always drives out the long-term, so the changes that can save the business never get done because the big change projects are starved for resources.

This detailed situation analysis provides the information needed to decide what can be done about the business. The final step, covered in this blog’s next article, is deciding what to do next – where do we go from here?

This blog has a number of other articles that provide deeper explanations as well as techniques for detailed situation analysis. Go to Blog | Business Techniques in Troubled Times by Thomas Gray | Thomas H. Gray – Consultant, CEO, Director and click on categories. Then select sets of articles such as 13 week cash flow, product strategy, process improvement, prune your business, using your numbers, pricing, sales support, distribution channels, and others.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

PrintFriendly and PDFPrint Friendly

After Situation Analysis: Where Do We Go From Here?

by Tom Gray | on Sep 12, 2012 |  Comments

There are only three choices for a troubled business: fix it, sell it, or close it. Situation Analysis tells you about the business today, but you need some more thinking to use that information to decide what to do with your troubled business tomorrow.

Now that you have done general and detailed situation analysis ( Fixing a Troubled Company: The Detailed Phase | Thomas H. Gray), you can answer three critical questions:

1. Is there a viable core business?

2. Capital: is there adequate “bridge” financing until the business can support itself?

3. Is there a capable management team?

The Turnaround Management Association calls these the 3 C’s: core, capital, competence. If there is no viable core business – if enough customers are not willing to pay a profitable price for what it does – then your options are reduced to two: sell it or close it. The same two options apply if the necessary capital is not available.

Competent Management and Vision

When the problem is seems to be competent management, one must ask, “Competent to do what?” The first response is: competent to run the projects needed to transform the business. But we don’t yet know what the transformed business would look like, and so we don’t yet know what those projects are! How do we determine that?

Start with dreaming. The owner and his or her advisors should create a vision of the business three years from now. The form of the vision is a brief statement about 5 to 10 key aspects of the business – this is the description of the transformed business.

Some examples of these key aspects are revenue, customers, products, competitive position, brand identity, infrastructure/facilities, key processes, distribution channels, level of profit, and others. Place yourself in the future, and make a statement of what it is at that time.

For example, our revenue is xyz, most of our customers are (describe them), they buy from us because we do (this) better than the competition, etc.

For some details on how to go about it, see five articles from this blog at Vision Development | Thomas H. Gray – Consultant, CEO, Director.

Gap Analysis and Management Skills

Once you have a vision, and you have completed situation analysis, you can identify the gaps between where the business is going and where it is today. This “gap analysis” easily translates into a list of key projects needed to transform the business.

Now you can identify the management skills needed to carry out those projects. Decide whether the current team has the necessary competence. If not, consultants and/or hiring are options, plus training the current staff.

These alternatives are not free, of course. Perhaps more capital will be needed than originally thought. So now that we know what needs to be done, it is time to revisit the questions of adequate capital and competent management.

Owner Goals

If capital can be found and management is adequate or can be augmented, the owner must decide if he or she wants to make the effort to “turnaround” the business rather than sell it or close it. So this is the point where you do another “revisit.” Think again about the owner’s goals, once you know the work involved in the turnaround.  Does he or she still want to tackle it, or does he or she prefer to find an exit?

If the owner decides to take on the turnaround challenge, an action plan is required — a set of project plans with interim targets and assigned resources. Lenders will want to see these specifics, and projected financials for the entire turnaround period, probably monthly at least for the first year.

Why Not Just “Make Do”

As noted in other articles, when turnaround plans fail, the reason is often that managers already working more than full-time on day-to-day issues are assigned to implement transformation projects as well, so they just don’t get done! Management resources are a critical element of these plans. Do we have the right resources? If not, when will we get them? Be sure to include their costs.

Hiring new resources to manage new work seems obvious, but costly. But the alternative to these costs is “sell it or close it”, not “make do.” Lenders may require that a “turnaround manager” be hired, or that the management team be augmented with people who have the missing skills, or that you hire people to take over the responsibilities of current managers so they can be freed to work on the new projects.

I provide turnaround consulting advice. In addition, for free advice on turning around your business, contact the Pro Bono Committee of the Turnaround Management Association in your area, or your local SCORE chapter. In the Chicago area, you can reach them at these links:

TMA Pro Bono: http://www.turnaround.org/cmaextras/TMAProBonoOverviewandApplicationv03.pdf

SCORE west, northwest, and south: www.scorefoxvalley.org

SCORE central and north: SCORE Chicago – Counseling, workshops, advice and business plans

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.

PrintFriendly and PDFPrint Friendly

Lending in a Community Bank Environment

by Tom Gray | on Sep 26, 2012 |  Comments

By Guest Author Steve Weihmuller, Vice President – Commercial Loans, Community Bank of Wheaton-Glen Ellyn

This article provides a Community Banker’s perspective on funding new loans.  As you all know, it has gotten tougher to get and tougher to provide funding over the last several years.  However, we are still lending, and the basic principles have never changed.  Commercial lenders really do like to make loans; really, we do like to lend money.  In fact, at the Community Bank level this is one of the few ways we can make a profit and therefore keep our doors open.

Since the recession, we have had a couple of different layers of approval added to the already difficult maze called “underwriting”, the industry term for deciding whether the risk/return on a loan request is acceptable.  This was needed based upon how the markets had operated before and during the recession.  The pendulum of finance swings high, either tightening and or loosening based on the economic view of the nation and the community in which we live.

Commercial lenders are responsible for helping to grow the bank profitably.  The only way I know how to do that, as a commercial lender, is to take care of clients, help them with their financial needs and attract additional clients along the way.  As a lender there is nothing more satisfying than helping someone succeed.  When the client wins and the bank grows together with the client, it makes all the inevitable paperwork worthwhile.   We all look for that symbiotic relationship that is win win for both parties.  OK, enough of trying to justify my professional existence. Let’s get to the brass tacks: what my underwriters and the federal government (who insures your deposits) are looking for when reviewing a loan request.

The Basic Questions

You need to be clear on each of these questions before you pick up the phone to call.

Who? What? Why? When? Where? How?   Remember, I want to lend you the money.  What you say here will make me want to continue the conversation, become skeptical, or politely let you know that I cannot help you.   Do your homework.  By having your basics worked out you will save everyone time.  Your time is valuable; don’t waste it.

Questions the underwriter has to answer in order to recommend an approval.

If I put the money out, will it come back?

  • Cash flow  - of the business — Always keep in mind that “Cash is king”
  • Liquidity
  • Net Worth
  • Gross and net profit margins
  • Do you know your break even numbers?
If the cash flow dries up, is there a secondary source of repayment?

  • Collateral
  • Liquidity
  • Guarantor/co-borrower
  • Global cash flow
Credit History?

  • Have previous creditors been paid back?
  • Is there a lot of unsecured debt (credit cards not paid in full monthly)?
  • What sort of credit score do you have?
For what Purpose? Would you want to lend yourmoney for this purpose?

  • Turn down answers:
    • Cover previous losses
    • Pay personal expenses
    • Buy gold
    • Approval Answers
      • Add staff to help with increasing demand
      • Buy equipment to cover increasing demand
      • Working capital to help cover the increased receivables
Who are we lending to?

  • Character – your resume counts
  • Have they ever done this before?
  • Does the purpose make sense?
  • What on the resume or past experience makes you think this will work?

Yes, I know “That’s a bunch of stuff to answer just for a couple of bucks.”  That’s kind of the point; as a commercial lender, for a Community Bank, I am looking for more than a transaction.  I want a relationship.  The good part is it actually gets easier as we get to know each other better.  The bad part is that the underwriter will still ask me for way too much information but, with all the i’s dotted and the t’s crossed, the presentation is completed and ready for approval.  My job is to add color and context, based on what you’ve told me as well as my own experience, to make the underwriter want to approve your request.

Business Documents: Cash Flow and P&L Results

Remember your audience – bankers and underwriters.  For a new business, an Excel spreadsheet showing where and how the cash flows will be generated is essential (two years minimum).  For an operating business, a two year future cash flow spreadsheet is also required, but it must be provided together with the last three years of the business’s financial history. This information is taken from the last three years’ tax returns and/or internal financial statements of the business.

Nobody cares what you did three years ago unless it shows a trend going down.  If it does trend down tell the why it happened and what you did to correct it.  If the trend is up, life is good but the underwriters will still ask why?  So be ready to explain how your brilliant management style has motivated employees and customers and kept sales and net income trending up.

Lending at Community Banks is alive; it still has a cold but is getting better every day.  With the right advocate, your commercial lender, you can navigate the maze and find the dough.

For more information, contact SCORE, your accountant, or your local community banker.

Steve Weihmuller is Vice President – Commercial Loans at the Community Bank of Wheaton – Glen Ellyn, and a member of SCORE Fox Valley. He can be reached at 630-545-4348 or sweihmuller@cbwge.com.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

 

PrintFriendly and PDFPrint Friendly

SBA Loans to Finance Your Business

by Tom Gray | on Oct 03, 2012 |  Comments

An SBA loan is not an alternative to a bank loan!The Small Business Administration (SBA) helps businesses get started and grow not by lending taxpayer funds directly, but by guaranteeing bank loans against loss. This is intended to make the bank more willing to lend to a small business with few assets and little history.

The SBA offers to guarantee up to 85% of the loaned amount in return for upfront charges (similar to a bank’s “points”) and a competitive interest rate, both paid by the borrower. The guarantee fees normally cover all the cost of SBA administration and loan losses, so that taxpayer money is not involved.

What Bank To Use?

Banks like the guarantee because it reduces their risk, and because the bank’s requirement to hold funds in reserve does not apply to the guaranteed amount. This means the bank has more funds available to make other loans, which is how it makes money. However, offsetting these benefits are two negatives: the bank cannot charge points for an SBA loan, and the process of executing the SBA loan guarantee is considered a burden by some banks.

As a result, not all banks will process a loan to obtain the SBA guarantee. Active SBA lenders solve that complexity issue by having an expert on staff who manages the process. Small business owners seeking an SBA-guaranteed loan should apply to a bank familiar with SBA loans for two reasons: the bank itself does not need to be persuaded that the SBA loan process is manageable, and the bank’s familiarity with the process means that it will be executed more quickly than by other banks. Note: the bank will want all the borrower’s banking business, not just the loan.

The top SBA lenders nationwide can be found on the SBA’s website at www.sba.gov. The top eleven in Illinois for 2011 are shown below.

Bank

# of SBA loans

Total Amount Guaranteed
JP Morgan Chase

519

$64,660,400
Ridgestone Bank

172

$144,106,100
Associated Bank

98

$16,872,700
US Bank

91

$56,173,600
Charter One

66

$6,892,000
Superior Financial

55

$627,000
First American Bank

42

$13,723,400
Wells Fargo Bank

38

$18,996,000
Fifth Third Bank

31

$8,694,200
Rockford Bank

29

$7,715,400
First Colorado National

28

$33,826,000

 

Other Illinois banks who are highly active in SBA loans include the Wintrust banks and Resource Bank.

Am I Eligible?

While the SBA has its own types of loan guarantees and its own underwriting standards, the first step in getting an SBA-guaranteed loan is that the bank itself must be interested in lending to a particular borrower for a particular purpose. Remember that the bank itself is responsible for at least part of the loan risk, because the SBA will not guarantee the entire loan. This means that all the advice in Lending in a Community Bank Environment about getting a bank loan still applies, even if you are seeking an SBA loan.

Assuming the bank is interested in financing you and your business, and the bank agrees to your request to seek an SBA guarantee, the next step is to understand the SBA eligibility rules and types of SBA loans to see which fits you best. Note that the limits stated here are subject to changing government rules.

  • Eligibility — Definition of Small Business:

-        Retail or Service: max $7M revenue

-        Manufacturing: up to 500 employees

-        Wholesale: up to 100 employees

-        Annual Profit: max of $5M

  • Eligibility — Use of Funds (Purpose):

-        Assets: lands and/or buildings; expand/convert existing facilities; machinery/equipment

-        Working capital: supplies, materials, inventory, “long term working capital”

-        Short term asset-based line of credit

-        Debt refinancing under limited circumstances

What Kind of Terms Can I Get?

For those who are eligible, the SBA’s main loan guarantee types and terms are presently:

Type

Max Loan

Max Guarantee

Max Term

Interest

Fees as % of Guarantee
7 (a) $5M >150K = 75%<150K = 85% 10 yrs, but25 yrs for real estate >7 yrs = Prime + 2.75%<7 yrs = Prime + 2.25% >700K=3.5%150-700K=3%<150K = 2%
SBA Express $350K 50% Same as 7a Same as 7a Same as 7a
Patriot Express* $500K Same as 7a Same as 7a Same as 7a Same as 7a
Export Express $5M >350K = 75%<350K = 90% Same as 7a Same as 7a Same as 7a

*For veterans or their spouses

“Express loans” are the most popular these days. The attraction is that no SBA documentation is required and there is no waiting for SBA approval. Only the lending bank’s application is required.

The Prime Rate in late September is 3.25%. The spread (amount above the prime rate) varies by length of loan, type of collateral, and adjustable rate terms of the loan.

In addition, the SBA offers a 504 type loan guarantee of up to 40% of the project for Certified Development Companies. See the SBA’s website for details.

SBA Microloans will be covered in the next article.

So what is the winning strategy for a speedy loan? Select an SBA-experienced bank, place all your banking business with them, fill out their application, convince them that you and your business are attractive, and ask for an SBA Express loan. Compare its terms with the bank’s own terms if there were no SBA guarantee. Use SCORE for advice in the process.

Contact Info: www.sba.gov           Phone: 312-353-4528

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

PrintFriendly and PDFPrint Friendly

Microloans: A Solution for Small Business?

by Tom Gray | on Oct 10, 2012 |  Comments

For those who don’t need a large loan, the paperwork and underwriting process for a normal bank loan seems like overkill. Fortunately, the financial community and the Small Business Administration (SBA) agree. Small loans involve less money at risk, so they should require less lender effort, but the traditional bank underwriting process was designed for larger loans. Microloans offered by non-profits such as Accion can be the solution to reducing the processing cost while still controlling risk.

Who Is Involved?

Microloans are targeted at low-to-moderate income business owners with a business plan, collateral, a co-signer if required, and the ability to self-provide at least 10% to 20% of the money they need.  Microlenders generally offer loan products that range between $250 and $50,000, though in some areas of the country the maximum amount may be larger, with specific guidelines on what they fund and maximum amounts for start-ups.   These are mission-driven organizations who must balance their mission – helping entrepreneurs – with appropriate financial rigor to satisfy investors and regulators.

Accion is an alternative lending organization dedicated to providing credit and other business services to small business owners who do not have access to traditional sources of financing. They handle 90% of microloans in the Chicagoland area, and estimate they are meeting only 10% of the need.  Accion is part of a 50 year old global organization and has been lending inChicagosince 1994.  It is also a member of the Accion US Network, the only microlending network in the country.

How Big Are Microloans, and What Are The Terms?

At Accion in Chicago, the maximum loan for a new business is $20,000. Their average microloan amount is about $8,000; the national average is $13,000. The maximum term of the loan is 6 years, with interest rates ranging from 8 to 13% according to the SBA, and 8.99% to 15.99% at Accion.  These rates are generally higher than rates charged at a bank but lower than a credit card.

Accion also has two reduced interest rate loan programs, such as one for businesses in selected counties. There is no prepayment fee for paying off the loan early, and the pre-payment option can minimize the interest costs incurred, but there is a closing fee which is added to the loan principal. Normally Accion disburses the cash within 15 days of receiving a completed application with all the required supporting documents. See Small Business Loans : Financial & Business Advice : Accion East and Online and Microloan Program | SBA.gov.

Am I Eligible?

Does this sound made to order for you? Consider the eligibility requirements and acceptable uses of the funds before deciding.

Accion   Eligibility Requirements

Acceptable   Uses of Funds (Purpose)
  •   Borrower is   the business owner or co-owner
  •   Strong   commitment to business and repayment
  •   Willing to   invest personal funds for 10-20% of amount needed
  •   Clean or improving   payment history with creditors
  •   Age 21 or   more, or 18 with co-signer
  •   Business   plan, one year of cash flow projections; brief plan if loan is $4000 or less;   SCORE can help!
  •   Industry   experience and alternate source of income if start-up
  •   Collateral   including all personal and business assets (includes co-signer’s guarantee)
  •   Buying a   qualifying business (up to $20K)
  •   Not   non-profit, real estate development, exporting, multi-level marketing,   lending, adult entertainment, weapons sales, or illegal or polluting   activities
  •   Normally   not for debt repayment
  •   Working   capital (includes marketing)
  •   Inventory   and supplies
  •   Furniture   and fixtures
  •   Machinery   and equipment
  • Buying a qualifying business (up to $20K)
  • Not non-profit, real estate development, exporting, multi-level marketing, lending, adult entertainment, weapons sales, or illegal or polluting activities
  • Normally not for debt repayment
  • Working capital (includes marketing)
  • Inventory and supplies
  • Furniture and fixtures
  • Machinery and equipment

 

Disqualifiers include outstanding tax liens unless you are on a repayment plan; active bankruptcy; delinquent mortgage, rent, or child support; or multiple recent charge-offs and delinquencies. Credit scores and history are considered on a case-by-case basis.

In 2011 Accion Chicago made 301 loans, with 40% to women clients and 75% to minorities. Accion also provides small “credit-builder” loans up to $2500 to those with damaged or no credit, and provides financial education workshops and one-on-one counseling to small business owners. 92% of AccionChicago’s clients are still in business two years after receiving the loan, and 89% of its clients repay their loans on schedule.

So if you are a good borrower, have a business plan, and your business needs startup money or funds for marketing or a vehicle or shop improvements, a microloan may be right for you. Contact SCORE for free advice as you create that winning business plan, at http://www.scorefoxvalley.org/  (Chicago suburbs outside Cook County) or http://www.scorechicago.org/ (Chicago andCookCounty).

Peer-to-Peer lending, also called “crowdfunding,” is a relatively new category of microloans. Two service providers, Prosper.com and Lending Club, were launched in the mid-2000s “with the idea of letting [mom-and-pop] investors make small loans directly to consumers. Borrowers would pay less interest than they would on typical credit cards, while lenders would get higher returns than they would in other yield-producing assets, such as government bonds,” according to Joe Light of the Wall street Journal (see Is ‘Peer-to-Peer’ Lending Worth the Risk? – WSJ.com).

These loans are unique in two ways: the loans are unsecured by collateral, and credit rating standards can be less than banks require, e.g. 640 credit score. They are similar to other microloans in most other ways: a maximum amount of $25,000 to $35,000, an average loan amount near $6000, a maximum term of five years, and an origination fee (points) of 0.5% to 4.5%.

Interest rates for these peer-to-peer loans, which depend on credit rating, range from 7.4% to 23% or even 28% for the riskiest borrowers.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

PrintFriendly and PDFPrint Friendly

Angel Investors

by Tom Gray | on Oct 31, 2012 |  Comments

By Guest Author David Gay, Director, Illinois Small Business Development Center

Who are “Angel Investors?”  

In a simple sense, they are individuals who see potential in your business model and are willing to invest “patient” money with the expectation that they will be rewarded in the longer term based upon the business’s success.  They also understand that their entire investment can evaporate if the business fails.

What does an angel investor look like?  Well, it could be family and/or friends.  Let’s face it, if they are willing to invest some cash in your business with delayed repayment terms, they are indeed angels: people investing in the business based upon the faith and confidence of the owner (entrepreneur) and the business model.  If the deal goes bad, well, that can certainly lead to some uncomfortable Thanksgiving dinners, but on the other hand, they won’t foreclose on your house, car and first-born child as a bank or lender would do.

Legally, angel investors are individuals who meet certain financial criteria as established by the Securities and Exchange Commission under Regulation D. They are required to have a net worth over $1 million excluding personal residence and/or annual income of $200,000 ($300,000 for dual income households) for the past two years with reasonable expectations that this will continue.  In other words, angels must be people that have sufficient financial resources that they can lose their investment and not devastate their personal situation.

Further, they are individuals that have an appreciation for entrepreneurial endeavors. They’ve been entrepreneurs themselves, or appreciate early stage opportunities in new technologies or market penetration.

What Types of Businesses Do Angels Invest In?

Angels may invest as individuals or may cluster in groups. Angel groups pool their money for investments in deals that meet their criteria in terms of industry type, stage of development, investment limits and other parameters.  Some angels or angel groups invest in pre-revenue/early-stage ideas, while others will only consider businesses that have realized sales, achieved profitability, and are looking to expand their markets or product lines.  It all depends upon the appetite of the individual(s).

Are angel investors right for your business?  It depends on your type of business. Individual angels and angel groups do not invest in “life-style” businesses, so if you are looking at opening the next great restaurant, retail store or consulting firm, your angels will be limited to the afore-mentioned family and friends.

Typically, angels are looking for new technologies or other business models that can tap into a large potential market, grow quickly without major transformation (scalable), and retain their competitive advantage during and after growth. These will be business-to-business models. Attractive technologies include bio-tech, nanotech, healthcare devices, software, and others.

What Are Their Terms?

A “typical” angel investment level is generally between a couple hundred thousand and couple of million dollars, the latter generally requiring several individual investors to pool their money under one investment structure.  The terms of the investment might seem severe to many entrepreneurs, as angel investors are looking to cash out of their investment to the tune of ten times cash within a 3 to 7 year time frame, so you can see that market potential and scalability are critical.

This 10x cash-out translates to an annualized rate of return near 50% for a single project, but the likelihood of failure with early stage investments is so great that this generates an annualized return of only 15-20% on the angels’ entire portfolio. For example, if the portfolio includes 10 ventures, typical outcomes could be 3 failing totally, 3 never quite making it and requiring more and more cash transfusions, 3 becoming self-supporting, and 1 shooting star whose spectacular returns carry the entire portfolio to the 15-20% target return.

In considering whether angel investors are right for your business, you must assess the size of your market and the ability of your business to grow quickly. For example, if you convince the angel(s) to invest $500,000 in your business today, how do you intend to cash them out to the tune of $5 million in about five years?  Usually the scenario for payback involves the technology being proved out, markets developed and a larger organization buying out your company.

One might now ask “what’s the difference between angels and venture capitalists if both groups are expecting such large returns on their investments?”  Well, it is a matter of scale in one sense.  Most venture capital groups make larger investments with $2 to $3 million being on the low side.  Also, venture capital is typically professional management of pooled (other people’s) money, while angels are investing their own funds and/or joining with others who are also using their own funds.

What Else Should You Know About Angel Investors?

Angels bring more than money to your business.  Angels tend to invest in businesses and industries that they understand, so they can bring managerial experience to the table and help make contacts, open doors and provide guidance that can prove valuable to the developing business.

There are some excellent resources out there on angel investing. For further information, you might look to the Kauffmann Foundation at      http://www.entrepreneurship.org/en/Resource-Center/Topics/Accounting-and-Finance.aspx  and/or the Angel Investor Association at http://www.angelcapitalassociation.org/.

David Gay is the Director of the IL Small Business Development Center, Center for Entrepreneurship at College of DuPage and has been instrumental in the formation of Collar County Angels. He holds an MBA in finance and entrepreneurship from the University of Denver, is a Certified Economic Developer through the International Economic Development Council and Certified Business Development Advisor through the IL Entrepreneurship and Small Business Growth Assoc. Contact Dave at 630-942-2771 or gaydav@cod.edu.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

PrintFriendly and PDFPrint Friendly

The Three Ingredients for Small Business Survival

by Tom Gray | on Nov 07, 2012 |  Comments

Years ago only 50% of new small businesses survived two years, and only 5% survived five years. But recently published data paints a prettier picture: now 50% of new small businesses last five years according the SBA, Census Bureau, and Bureau of Labor Statistics.

Milestone

% of New Corporations Surviving

% of New Sole Proprietorships Surviving

% of New Venture Capital-Backed Companies Surviving

2 years

70%

70%

 

3 years

65%

50%

 

5 years

50%

 

84%

10 years

33%

 

 

15 years

26%

 

 

Sources: http://www.sba.gov and http://dor.wa.gov/docs/reports/BusinessSurvivalReportOct2007.pdf.

Nevertheless, the attrition rate is pretty scary! Considering the table above, it seems that more resources – people and funding – may promise longer survival.

Sole proprietorships have the worst record with 50% failing within three years, while 50% of corporations last five years, and venture capital-backed businesses have the best longevity.

The risk is higher for sole proprietorships (52% of new businesses). Why? Maybe it’s because they lack the resources to support the business until it is self-supporting, or maybe it’s because their business planning was incomplete or too optimistic, or their marketing was less effective than predicted.

Let’s recognize that many of the “corporations” are one-man S corporations or LLCs, just as resource-limited as sole proprietorships. So why do they survive longer? Maybe their decision to minimize liability by incorporating is an indicator of better planning overall?

Failures of venture capital-backed new businesses tend to occur after the fourth year, when capital infusions from the backers dry up. The 84% figure above is understated, as another 11% have been acquired or gone public (IPO) during the first five years.

While venture-backed businesses tend to have a longer life-cycle on average, their overall performance is not that impressive! 95% fall short of projected return on investment or miss their breakeven target date. 75% never return the investors’ money, though they may survive. 30% fail completely. Only 10 to 20% generate substantial returns. See The Venture Capital Secret: 3 Out of 4 Start-Ups Fail – WSJ.com

So after three to five years, the glass is half full, or half empty. Why do new businesses fail? You can find articles listing 7 reasons, 8 reasons, and even 15 reasons. But they all boil down to only three ingredients that must be present to survive: the planning, capital, and effective marketing. These map well to the Turnaround Management Associations 3C test: Core business, Capital, and Competent management.

Reason One: Strategy & Planning are Weak

Strategy and Planning starts with choosing a winning business model, one that fits customer needs and market trends profitably. This is the “viable Core business” that TMA looks for. Second, planning includes thinking through business operations, marketing and financing to understand the expertise, skills and effort needed. Finally, planning also implies that you successfully follow through and implement the plans – you actually hire or contract for that expertise and those skills, and you gather enough resources so that the effort needed is feasible, not superhuman! In other words, you have a viable concept, and you put yourself in a position to succeed by good planning and good implementation.

  • Startups with a well-conceived business plan do better, because they know what they have to do, and how much it will cost. Sometimes a good business plan tells the entrepreneur that entry is a bad idea, saving the cost and anguish of subsequent failure.
  • The business plan includes a realistic view of competitors, and what is needed to be different enough to attract their customers. This is the most common weakness for new businesses.
  • The numbers in the business plan help the owner judge the price level needed to generate cash to run the business and pay off investors/lenders, given a reasonable sales forecast. Too often new businesses charge prices that are too low to survive. If your differentiation is not enough to warrant prices high enough to survive, do not launch the business!
  • The marketing, operations, and financial sections of the business plan make clear the skills needed to succeed. Few entrepreneurs have all the necessary skills in one person, and the plan is the place where they decide how to gain the missing skillsets.
  • The business plan will also provide some hints about the effort and persistence that will be needed to succeed. If the financials can support only the entrepreneur, and he or she lacks the necessary skills, or cannot commit to years of working harder and longer than one would in a salaried job, the business won’t work. Many new businesses underestimate their costs for gaining professional expertise and/or advice.
  • The business model is designed for the world as you know it, but that world is sure to change over the years. Sometimes the changes are predictable, but often they are not. A business that will survive for many years will need the flexibility to adapt to change, to modify its business model. It will also need to financial resources to survive while adapting, which brings us to the second reason for failure.

Reason Two: Capital Falls Short

“Cash is King” in a small business. The immediate reason small businesses fail is that they run out of cash. But why does this happen? In the planning phase, they may have underestimated costs, or been unable to get all the financing they needed. In the operating phase, perhaps growth was too slow, or margins were smaller than forecast. Ask yourself:

  • Do I have enough to start with? Many small businesses require two years before they are generating enough profits to recover their startup costs as well as cover day to day operational costs. If the business plan is too optimistic, startup funds will fall short, and cash will run out during these first two years.
  • How can I minimize cash outflows (“burn”)? Rent or lease rather than buy. Get used equipment rather than new. Defer the entrepreneur’s salary. Hold a cash cushion for the unforeseen: weak sales, higher costs, changes required to keep up with the market.
  • Do I understand my financials, especially my cash flow? Can I predict what happens if sales fall 25% short of forecast? Too many entrepreneurs leave the numbers to their accountant, but accountants only look at the past. They are not in the business of forecasting cash flow, planning for new financing, and calculating the need for higher prices. This is “finance,” and the only one responsible for finance is the business owner. If you don’t have these skills, acquire them or get an advisor you will listen to.
  • Will my prices meet my profit goals? Pricing depends not just on competition. Prices need to be high enough to cover overhead (fixed expenses) and generate the necessary profit. There is no point in setting prices that win unprofitable sales. Too many entrepreneurs ignore the fundamental goal of pricing – to make a profit after covering overhead. They are either unaware of the overall financial results of their business, or are simply afraid to charge more than competitors even when their differentiation would still attract customers. Fewer customers at a higher profit is a road they are afraid to take. The result is stumbling along until they run out of cash to support an unprofitable but dearly-loved business.

Reason Three: Marketing is Ineffective

In addition to good planning and adequate financing, effective marketing is the third key to success or failure.

Marketing is not just communications. It includes the product variations, pricing and discounts, where the product is sold (location), communications, and customer service. Once you have a good story to tell (products, pricing, attractive location), the key to sales is communications and the customer service that brings back repeat purchasers.

In today’s world, communications begins with the Internet. You will need web and social media marketing skills. You will also be using traditional media, often to attract prospects to your website. Your business plan must provide for these skills and their costs.

No one can perfectly predict the effectiveness of a marketing or communications initiative, so effective marketing depends on tests and revisions to find which approach has the best results. Thus marketing takes time and attention, creativity, and then adaptability. It is not something that can be considered every now and then. Entrepreneurs focused on operational excellence fail without the communications that attract new and especially repeat customers.

Being one of the survivors requires realistic plans, adequate cash to fund the business and pay for missing skills yet provide a cushion for the unforeseen, effective marketing, and persistent effort over the years. A good idea and great effort are not enough. The effort is wasted if you run out of cash. So do a good job planning, acquire the missing skills, see how much financing you will need, and then get more than that so “hiccups” do not leave you without any resources! This will give you a good start.

As the business develops, watch for changes in the market, attend to your marketing, and understand your overall financials – especially pricing – to build a sustainable profit-making enterprise.

Next week we’ll begin a series of articles on Business Planning and Effective Marketing.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

PrintFriendly and PDFPrint Friendly

Describing “The Market” in Your Business Plan – Section 3.0

by Tom Gray | on Nov 21, 2012 |  Comments

Effective marketing is the hallmark of a successful business. Its absence means the business will fail. If it is that important, you cannot leave it to chance. You must plan how to do marketing effectively.

How Marketing Fits Into Your Business Plan

Your Business Plan is the first place you actually write down those random thoughts about marketing, so you and others can see the logic and the holes. Once you figure out the marketing, then you can estimate its cost, and include that in your financial section.

But before you can figure out the marketing, you need to know who are you going to be selling to. Groups of likely prospects are called your “target market.”

Describing “The Market”: Section 3.0

To describe the Market, you first talk about industry (i.e. all your competitors) sales volume in units and dollars for your target area. Include the sales growth rate. Describe the customer groups (segments) who make those purchases: their demographics, any other characteristics such as interests or how often they buy, and how many there are in the area. Seasonal ups and downs are also mentioned here.

For some sources to measure the size of market segments, see Target Market | Thomas H. Gray.

Next you discuss trends that might change those industry sales figures, or change the ways customers are solving the problem that your product addresses. The acronym DPEST reminds you what trends to think about: Demographic, Political/regulatory, Economic, Socio-cultural, Technological. When you mention a relevant trend, you will of course say why it is relevant – how it is affecting the current or future market for your product. Your goal is to show that the trend is helping your success – you are consistent with it, not fighting it.

Then you choose the primary segment you will be selling to, and up to two secondary segments. This is your target market. Describe your typical customer in each of your target segments. Example: “he or she is (how) old, has x education and y income, family status is z, lived in the area for a years, is interested in b, c, and d, and values e, f, and g enough to spend q dollars on them annually.” Now estimate how many of those target customers live in your selling area, using the sources in the reference above.

Why bother to identify a target market? Why not sell to all? Effective communications and economical generation of “sales leads” both depend on targeting an audience that has some specific characteristics. These audience characteristics drive the design of your communications plan, the features of your product, your price, and where you sell. You want to spend marketing money reaching those most likely to buy, and buy a lot, and often, not the long shots! So targeting is critical to controlling the marketing budget. It is also critical to crafting a message that is effective by speaking directly to the needs of a specific group of customers.

In the organization of your business plan, industry definition would be 3.1, market trends is 3.2, and target market and its size is 3.3.

Competitive Analysis is Crucial!

Now you move on to a crucial issue for your business: Competitive Analysis (section 3.4). First, describe your competitors with a paragraph for each. If there are too many, group them into types of competitors so there are no more than 3 to 5. In this description, consider how they are perceived by customers (their “positioning”), and how well they satisfy the customer’s buying criteria – those 5 to 7 things a customer weighs when choosing a vendor for your product.

After this description of the competitive landscape, summarize it in a table as described in Competitive Analysis | Thomas H. Gray – Consultant, CEO, Director. The table shows how well each competitor meets each of the buying criteria (High, Medium, Low, or not at all).

Then use the table to evaluate your own offering the same way. Where you are High in satisfying customer buying criteria and others are not, this becomes your differentiation – the reason for your business to exist. If there isn’t any, don’t launch the business! If your differentiation is only price attractiveness, find some extra value to offer that will help you keep customers when competitors lower their prices to match yours.

For a short video on how to do this, go to Competitive Analysis: Find Your Edge – YouTube

Now you know who you are selling to, and what advantages you offer them compared to your competitors. Your headings look like this:

2.0 Business and Product Description

2.1 Business Description

2.2 Product Description and Need Met

3.0 The Market

3.1 Industry Definition

3.2 Trends in the Market

3.3 Target Market and Size

3.4 Competitive Analysis and Differentiation

Once you know this, you are ready to work on your strategy and tactics for capturing a share of this market. The next article addresses these.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.

PrintFriendly and PDFPrint Friendly

Marketing Strategy and Tactics – Section 4.0

by Tom Gray | on Nov 28, 2012 |  Comments

This is the fun part! Now that you have analyzed the market, chosen a target market, and selected your differentiation, it’s time to envision how you will be perceived by the market (positioning) and how you will support that image or slogan with each of the 4 P’s:

  • product
  • price
  • place (location and distribution)
  • promotion (communications)

Later, the market description and these marketing plans will enable you to prepare a well-informed sales forecast.

Positioning

Marketing Strategy and Tactics start with “positioning.” Considering the differentiation you selected at the end of your competitive analysis, create a slogan or catchy statement that says how you want the customer to think of your product or company. It will be based on your competitive advantage, but it will be expressed in terms of the benefits that advantage delivers to the buyers in your target market.

For example, in its early years Amazon’s Kindle e-reader used the phrase “Books in 60 seconds.” This is a simple statement of the benefits to buyers resulting from its competitive advantages (differentiations) in the size of its library, the portability of the library within the e-reader, and its free wireless downloads of books. But they were not buying the size of the library – they were buying books downloaded fast. This was the benefit to them, so it became the “positioning statement.”

Later, after tablet computers were launched with e-reader applications and wireless download, Kindle was no longer very different on these features. So its positioning shifted to emphasize its non-glare screen display by adding “read anywhere” to its positioning. Again, buyers were not buying the screen technology for its internal clarity. The benefit they were buying was the opportunity to read on a screen in bright sunlight, i.e. anywhere, even at the beach or on the deck.

Aligning Goals, Strategy, and Tactics

After your insightful positioning statement, the next step is to create the big picture view: company or product goals, the strategy to achieve them, and key tactics to implement that strategy.

Your goals should be specific, both in time and in measurement. For example, “build a presence” is too vague. It would be a good goal statement if you added where, with who, when, and how much, such as “build a presence among Chicago area golfers, so that 50% are aware of the product and 25% express interest in buying it, within two years after product launch.”

I like to use a small table to match my goals to the main strategy for achieving them, and make a brief note of the main tactics I’ll use to implement each strategy. This keeps me consistent and on track, so that my efforts are focused on achieving the goals I started with. Here is a model for you to consider:

 

Goal

Strategy

Tactics
Build presence in Chicago area in two years: 50% aware; 25% interest Communication & Promotion based on local events & PR -       Communications-        Trade shows-        Demo days at courses-        Order via Website
Sell 500 units year one Presence in Pro Shops -        Direct Sales-        Discounts to sellers-        Merchandising
Sell 1000 units year two Presence in Retail chainsIntroduce  complementary new product -        Above plus celebrity endorser-        Product roadmap

 

This table provides guidance as you consider each of the 4Ps, making sure that each one not only supports the positioning but also implements the strategy to achieve the goals. Any activity that does not contribute to achieving goals or supporting positioning should not be done.

This is what Strategy is all about: allocating resources to reach goals. But strategy also means refusing to allocate resources to activities that do not enhance the likelihood of reaching goals.

The Plan’s Organization

Under the 4.0 heading, state your positioning and marketing goals. The next five subsections (4.1 through 4.5) address the 4 Ps and customer service. Section 4.6 summarizes your sales forecast.

4.1 Product Plan

You briefly mentioned product features in Section 2.2. Here is where you explain more fully any features that are significant due to difficulty, cost and competitive impact.

Next, describe the “augmented product:” those added features or services that make the entire offering more appealing, different, and valuable, e.g., packaging, choice of paint job, free installation, warranty/guarantee, user manual on a flash drive, etc.

Third, describe your set of product bundles, often three tiers of product content for three different prices. They might be named basic, standard, and premium, or bronze/silver/gold, but I’m sure you can do better than that! See Product and Service Bundles: Product Strategy | Thomas H. Gray for more on these product tiers, also called packages or bundles.

Fourth, provide a “product roadmap” It says what you will do to change the product in the coming months and years. Will there be new versions? If so, what will be their new features? Which market segments are these designed to attract? What technology advances are needed to provide these new features? When can this be introduced? Consider what competitors are likely to offer or respond with. See Product Roadmap | Thomas H. Gray.

4.2 Pricing Plan

First, show the prices of the product offers (also called packages, bundles, or tiers), and the prices for standalone services outside of these packages or tiers. Ideally, compare the price to the variable cost of the feature, and calculate the contribution margin. You will need to do this anyway for your financial forecasts.

Costs/price = margin percentage. Your product margin should be at least 50%, i.e. price should be at least twice as much as variable cost. This provides enough cash to cover overhead and still deliver your target profit.

Second, if you did a product roadmap, use a table to show price evolution per version over the next two years.

For pricing ideas and methods, see Pricing | Thomas H. Gray. Consider reactions of competitors to price changes. Will they follow? Can they afford to? What they do influences what you would do next.

Average price per product sold per month is an important input to the revenue (sales) forecast, so it would be good to state your estimate here.

4.3 Distribution Plan

Where will you sell your product? It should be where your target market likes to shop. Also, your choices should be consistent with your positioning: high end products must be sold at high end locations. Often you will choose more than one distribution channel to get broader market coverage. This means you will need to deal with price differences among channels:

  • Online: your website; catalog websites such as Amazon; other special interest sites
  • Retail: chains, independents, your own stores
  • Distributors and Agents: add expertise and network of contacts; pay commission or discount
  • Direct Sales Force for B-to-B products

For each channel, mention the price discount or commission, and estimate the % of total sales this channel will generate. This enables you to calculate sales revenue and costs accurately in the plan’s financial statements.

Describe any significant sales support costs. You incur these costs to generate more sales, by making your distribution channels more effective and more motivated. Examples could range from your website to a portal for distributors as described in Sales Support Techniques for Sales Success | Thomas H. Gray . These expenses will later be added to your financial forecast.

Finally, mention any logistics issues and costs involved with getting the product delivered from your location to the selling location.

4.4 Communications and Promotions Plan

What is the message you want to send, to whom, via what media, and what amount or % of revenue are you willing to spend? If you have new product offers directed to new target market segments, consider which media would reach them. Most small businesses today depend on their website, social media, local sponsorships and events, and inexpensive local traditional media such as coupons. A future set of six articles will provide more guidance on your Communications Plan.

The timing of communications and promotions should be estimated in this section of your Plan, because the effect of these efforts will boost revenue shortly after they begin until they end, and the costs will be incurred before they start until just before they end. These revenue and expense effects must be shown in the financials in the correct months. Obviously, if there aren’t any such effects, then the program is ineffective and should not be done!

4.5 Customer Service Plan

Customer service can be important in making the sale, by providing an accessible entry point for questions, and by referring prospects to the right channel for closing the sale. Customer service can also be critical for keeping customers and for repeat purchases. So this section of your business plan addresses accessibility, call routing/referral routines, policies for discontented customers, and customer information provided with the sale.

In order to develop accurate financial forecasts, this section will also include the cost of customer service: facilities, staffing, training, and reference materials.

4.6 Sales Forecast

This section will be addressed in the next article.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

 

PrintFriendly and PDFPrint Friendly

The Sales Forecast – It’s Time to Commit!

by Tom Gray | on Dec 05, 2012 |  Comments

Your sales forecast is fundamental to a realistic business plan. It determines profitability. The simplest sales forecast is “units sold per time period,” usually per month. If you have more than one product type, you will want to forecast sales of each type separately.

How Do You Estimate Unit Sales For The Future?

Most companies forecast sales by considering several methods, blending the results into something they trust. Here are several common methods:

1. Trended: assumes past sales trends will continue

2. Bottom-Up: Ask your sale force and distributors

3. Top-Down: Make your own forecast per salesperson or distributor

4. Market Share: Estimate your share of the market for the year, and then spread those sales across the months considering industry seasonality and your own growth trend.

5. Pace of Growth: Estimate your capacity at business maturity, and gradually grow sales to that point.

6. Customer-Driven: Estimate sales per customer per month. Then estimate a reasonable number of new customers per week or month based on the marketing programs you expect to use. Add them to a spreadsheet row for your new customer additions for each month, and continue to show them in your customer base for as many months as you estimated they would continue to use your services. Remove them when that expires. Customers x unit sales per customer = sales.

Reality Test

Forecasts always need some kind of external benchmark to provide a reality test. For example, you could use the sales funnel (see Sales Funnel | Thomas H. Gray) to test the practicality of a bottom up forecast.

Consider the sales cycle as well. The sales cycle estimates the time between the first customer contact and closing the sale. It may be a few minutes, or six months. If a salesperson is going to make 4 sales in January, and it is now November, how many accounts should he already be in contact with, based on the normal percentage of contacts converting to sales? Is he on schedule, or will he miss the target?

But There’s More!

Once you have a forecast of units sold, the hardest work is done, but you have delivered only a fraction of the information needed! With a little more effort, using either company data or assumptions already in your business plan thinking, you can provide a forecast that is really useful for projecting expenses, profits, and cash flow. You need to forecast each of these in your business plan anyway.

For the most useful sales forecast, the other estimates needed are:

  • Average price per product per month (avg. price times units = revenue). This estimate uses the list price minus expected discounts.

 

  • Sales commission is part of your variable costs. Estimate it as a percentage of revenue.

 

  • Variable costs per product (variable cost per unit times units = variable expenses). Subtract these from revenue to find gross or contribution margin. Use that to calculate breakeven point, and to verify that prices are high enough.

 

  • The cash cycle tells you when cash started to be spent before the sale, such as for raw materials and labor, and after the sale for commissions and shipping. It also tells you when cash arrives as payments after the sale.

 

For example, you may order raw materials 2 months before a sale, receive them in two weeks, and pay for them 30 days after that. Thus cash is going out two weeks before the sale. Cash is received at the time of sale in some businesses, or 30 to 60 days later for those companies who use invoicing.

 

Paying for cash expenses before receiving cash payments requires “working capital,” a cash cushion. When it disappears, the business either fails or goes deeper into debt. So the cash flow forecast is probably the most important forecast a small business can make. A short cash cycle means less working capital is needed and success is more likely.

 

This table shows how each forecasted item is used by the business or in the business plan:

Forecasted Item

Used to determine

Financial Statements
Unit sales by product Revenue Operational capacity needed Variable costs
Avg. price per product per month Revenue
Revenue P&L Cash Flow
Sales Commission Sales compensation planning Expenses or net revenue P&L Cash Flow
Variable Costs Expenses Gross or Contribution Margin à Pricing & Breakeven point Cash needs P&L Cash Flow
Cash Cycle Incoming cash Cash available Financing needs Cash Flow

 

How Do You Capture All This Thinking Into Documents?

First, write down your assumptions as you make the unit sales forecast, and as you make the other estimates (average price, sales commission, variable costs, cash cycle). A list of key assumptions goes in the Financial section of your Business Plan, and this is a good time to start it.

Second, enter your unchanging sales commission percentage and variable costs per product into Excel cells, and reference these cells in the formulas used to calculate revenue, sales commissions, and variable costs.

Third, set up a new set of rows for cash flow calculations. Assume all sales occur mid-month. Label a row for revenue, a row for sales commission, and a row for each of the variable costs. For each cell in these rows, create a formula to find the cash effect occurring that month due to unit sales in any month. For example, using the previous example in the cash cycle definition:

-        June variable costs = July unit sales for the product x variable cost for that product (supplies paid for 2 weeks before sale)

-        September revenue = July unit sales for the product x July price for that product (invoice paid 60 days after sale).

Why Not Just Use Business Plan Software?

Of course, you could also enter your estimates into packaged software such as Business Plan Pro. Then all your numbers would cross-foot, but you would not know how they were calculated because you let the software do it! If you don’t know how they are calculated, you will have a hard time managing them. In a small business where “cash is king,” it’s better to know your numbers intimately if you want your business to succeed.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

PrintFriendly and PDFPrint Friendly

Marketing Communications Plan: Audience, Goals, Tools, Budget

by Tom Gray | on Dec 26, 2012 |  Comments

“How do I get more customers?” is always one of the top questions for every small business. You have a great product, attractive pricing, and a folksy way of working that customers are sure to find appealing. But how will they learn all this? To paraphrase the old song, “to know me is to love me” – but how will they get to know you? Effective marketing communications (“marcom”) makes everything else in your business work. When “marcom” is missing, your business is facing failure.

Who is the Audience?

Effective communications starts with understanding your audience. Who are they? What need are they trying to satisfy? Where do they look for solutions? What media do they pay attention to? What presentation style gets their attention? Your audience is your target market. You defined them earlier in your plan – see Target Market: “Who Are My Customers?” | Thomas H. Gray – Consultant, CEO, Director.

Goals and Tools

Your first communications goal will be to inform the target audience that you are in the business, and draw them to your website. Your tools here will be advertising, public relations/publicity, and events. These are considered “mass media,” because they are designed for mass consumption and are much cheaper per “impression” than using more targeted individualized approaches.

The website is your main tool for the second goal: to persuade them to choose you rather than a competitor or substitute solution. The website provides for more extended interaction than advertising. It enables you to present the benefits and the options using video, graphics, and even chat, as well as print. It also enables a direct link to purchasing.

Some forms of public relations/publicity, such as articles and speeches at events, also allow the more lengthy presentation that persuasion requires, but they are delivered to a less-differentiated audience than those who actually go to your website. Thus they are really mass media, more useful to spur the search for your website rather than directly persuade anyone to purchase.

You will also use the website to capture buyer contact information, which you will use later to achieve your third goal: to remind them to buy again. Reminder communications reach only the buyers as individuals, so mass communications are inappropriate. Direct or individualized media include email, various social media directed to or available to these fans, messages included with invoices, and the more expensive traditional approaches: direct mail, telemarketing, and personal selling. A regular program of communicating scheduled messages to customers is called CRM: customer relationship management.

As you can see, the process moves from a wider market in the informing stage to a very personal and targeted relationship in the reminding stage. Since all these stages are operating at the same time, you will be using different media for these different purposes in an integrated approach. Your messages will be slightly different as well.

This table links communications goals to the marcom mix tools and provides examples for each tool.

Goal

Marcom Tools

Example
Inform Advertising

Public Relations/publicity

Event

 Online: banner, pop-ups, YouTube, email; traditional*

Press release; article

Speech; sponsorship; sweepstakes
Persuade Website 

 

Sales Promotion

 Product/service pages for each target market segment; catalogue; videos; success stories, order/pay

Time-sensitive special offer, communicated by any of the other media plus coupon mailers and coupon websites
Remind Regular email 

Social Media

Direct Mail/telemarketing

 Planned messages matching customer purchase history

Blog; Facebook Business Page; Tweets

Renewal offer

*Traditional advertising involves at least seven media choices. The next article will address the best situations for each type: TV, radio, newspapers, magazines, directories (e.g. yellow pages), outdoor (e.g. billboards), and direct mail.

How Much to Spend?

Obviously, the opportunities to spend money on marketing can quickly exceed the company’s marketing budget. How do you decide how much to spend?

A new or growing business should choose its marketing budget by what it takes to get the job done (the “task” method), because failure to do the communications job means the business fails. Established firms can choose a percentage of revenue as their marketing budget, but new entrants cannot, because they do not yet have the revenue base. New entrants have little revenue to start with, so two methods that do NOT make sense for them are “percentage of revenue” and “match the competitors’ spending.”

New and growing firms must design the campaign first, frugally, and then price it out. If the cost seems unaffordable, they can then consider the cost and communications impact of removing or modifying the less critical elements. The remainder becomes the budget. Will it all be spent? That depends on the results of tests of the various initiatives. All marketers test before full scale implementation.

Remember your goals. You need to spend enough to get noticed by a large enough share of your target market, despite your competitors’ messages. Your name needs to be available or recalled when they are ready to buy, and you will never know when that is. So your marketing must provide some “presence” all the time, occasionally boosted by additional spending to communicate new offers or new promotions, or to make a special effort in key buying seasons.

Advertising only sporadically is a common error in small business communications. The brand has no constant presence, so it must reintroduce itself for every episode or campaign. The expense of previous campaigns is wasted rather than establishing a constant base of messaging. During the gaps, the brand is not heard or considered by customers choosing to buy at that time.

Planning market communications starts with understanding the target market, the audience. Next, you select the marcom tool(s) to fit each of your three goals, assess potential cost, modify the marcom tools mix, and select a budget.

Some say market communications can be summarized in six M’s. In this article we addressed Mission, Mix, and Money. The next articles consider Media, Messages, and Measurement.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

PrintFriendly and PDFPrint Friendly

Marketing Communications Planning: Media

by Tom Gray | on Jan 02, 2013 |  Comments

I have a budget, and I cannot do it all. What media do I spend my money on? Consider the strengths and weaknesses of each type of media, and match them to your product and your communications task or goal.

This article addresses your use of traditional media, usually with the goal of attracting people to learn more at your website. It assumes you have a good website, and you are updating it with special offers, pictures of events, videos showing customers enjoying product benefits, success stories and endorsements. The first thing you should spend your money on is a great website. Then you can spend money on attracting people to view it. Using social media will be addressed in a future article.

Media Strengths and Weaknesses

In this table on media strengths and weaknesses, L (low) is a weakness and H (high) is a strength.

Media/S&W Local Targeted* Aud-Vis / Graphics Cheap/Fast Complex Msg#
Network TV

L

L

H/H

L

L
Cable TV

M

M

H/H

M

L
Radio

M

M

M/L

H

L
Metro Newsp

M

L

L/L

H

M
Local Newsp

H

L

L/L

H

M
Magazines

L

H

L/H

L

H
Yellow Pages

H

L

L/L

L

M
Coupons

H

L

L/H

H

M
Outdoor

H

L

L/L

M

L
Direct Mail

H

H

L/H

M

H

*By Income and/or Interest or hobby

# Complex messages require space to tell your story, and media that can be saved for later reference

 

Network television offers visual presentation, but it costs too much for small businesses, both for the media time and for the production cost of the ad. Cable TV is cheaper, more local, and offers the option of a streaming print for those who wish to avoid ad production costs. However, if you want to choose print, cheaper media are available. Some targeting by type of channel is also possible on CATV. Neither has the space or permanence for complex messages.

Radio is local and can be targeted by type of station, but not by income or interest. It is cheap and fast, but t lacks the space and permanence needed for complex messages. Alternative mobile entertainment seems to be making radio less useful to reach customers.

Newspaper ads can be targeted geographically if local newspapers are used. They offer the space for complex messages, but not the permanence for reference unless your customer clips the ad. They are cheap and fast, but look elsewhere if you need quality graphics.

Magazines can be highly targeted by interest and income. They offer high quality graphics, and space and permanence for complex messages. Magazine ads take longer to produce and cost more than newspapers and radio, and their publication schedule cannot handle fast-changing offers.

Yellow Pages are the pre-internet search option. They are quite expensive, and involve lead times of a year or more due to annual publication. Their graphics are poor compared to internet search.

Coupons can be printed in other media, or mailed as part of packages to selected geographic areas. They are now available on internet coupon sites as well. Cost is low for production, but can be high when the cost of the discount is considered. This media makes sense if your objective is to attract interest and “tryouts,” in the hopes of more profitable sales later.

Outdoor includes billboards and various types of signage. It is suitable for reminders for impulse purchases of well-known products for a mass market customer base. It does not fit complex messages or targeted markets. Cost and lead time for production and placement are moderate depending on the location.

Direct mail is very targeted and offers excellent graphics as well as permanence. Its success depends on accuracy of the data in the list used. The most targeted lists can be rented from magazines and associations for one-time use. Direct mail is costly, perhaps $2 per piece, and a 2% response rate is good, so the cost of a response is really $100. Once you have the list, lead time to implement is moderate. Due to the cost of direct mail, different campaigns are tested for success using different response numbers for tracking. This means that rolling out a full campaign takes several weeks.

Matching Media to Product and Communications Goal

If you have a mass market, you need mass media. However, most small businesses have more targeted markets, at least in terms of locality, especially if you spent a little time defining your target market as previously recommended!

For a goal of inform/persuade, this means that many small businesses will find the best fit with local newspapers, magazines for special interests, coupons, good signage if they have a retail location, and direct mail for high margin products if tests prove it can be effective.

For a goal of reminding customers to buy again, if you have the customer’s contact information then internet contact is best. Inexpensive direct mail (postcards) is also a possibility. If you lack that contact information, then local print, coupons, and good retail signage are the best places to spend money on traditional media.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

PrintFriendly and PDFPrint Friendly

Tips for Your Website

by Tom Gray | on Jan 09, 2013 |  Comments

Your website is your most important communications tool, so give it your best efforts! It’s your front door, that critical first impression. Like your mother told you, “You never get a second chance to make a first impression!”

There must be as many articles about creating a good website as there are small businesses in America. This article makes no attempt to recap them all; it simply offers some tips from the author’s experience, as part of a series on effective marketing communications techniques.

The most important tip is this: get a professional designer, but content is your job.

Professional Designer

Why use a professional designer? Here’s what he or she can do for you:

  • Advise on organization of your tabs and pages. Viewers appreciate clear and consistent organization and navigation between tabs and pages.
  • Provide the graphics that knit all your pages together. This gives your site a consistent “look and feel,” which pleases the reader and makes you look more business-like.
  • Solve all the technical issues, such as which host to use, which software to use (e.g. WordPress), navigation from one page to others, and proper use of mini-apps (“widgets”) for special features.
    • Examples of widgets are print versions of pages, Facebook and other social media links, your blog, shopping cart, site popularity metrics, and contact by email.
  • Add the copyright statement
  • Advise you on how to be found in search engines like Google using keywords/metatags and Search Engine Optimization (SEO) techniques.

Find out if your designer would be creating your site by starting from scratch, or by using established software (also known as content management system, such as WordPress). Do NOT use someone who starts from scratch, because then you will be paying to re-invent the wheel, and you will be dependent on the developer for updates! Everything you will need is already developed and available. Plus, it is integrated, so you can add new features with only a couple tweaks instead of paying for new development.

I am quite happy with the services of Aimee Grover, aimee@plaidfish.com.

Content is YOUR Job

Do NOT leave the content of the site to your designer. Content is YOUR job! It’s your reputation and your message. It’s worth your time. But help is available. Your designer can providing a framework for the site as a whole and for each page, plus some guidelines on what makes great content. Once you’ve drafted it, you could hire a content editor too.

Start with making a list of your goals for the site. Usually these will include:

1. Communicate my differentiation and positioning – how I add value for customers, better than their

other choices.

2. Provide credibility assurance – why you can believe that my services will meet your needs best.

3. Offer value in the website itself, to attract more new and returning visitors.

On this last point, one of my trusted advisors puts it this way: “The goal of a website should be to create ‘Raving Fans’. Connect with them. Get them to subscribe. Add value. Build a relationship. One of the most important goals of any website right now is to create a mailing list – just because there are so many other ways companies are building relationships with social media that never existed 10 years ago.”

Second, keeping those goals in mind, list the topic of each page of your site. Examples include Home, About Us, Product/Service pages, Contact Us. There can be others as well, such as success stories, descriptions of capabilities, etc.

In your list, show which pages are the main ones, having a tab at the top, and which ones will fall within one of those main pages. Review other sites to get ideas for what to do and what to avoid, especially competitor sites. Your designer can help with this.

Third, for each page, make a little table that shows how it will deliver on your goals:

  • Positioning message
  • Credibility, such as a testimonial quote at the bottom of the page. To create a testimonial, write it yourself and then send it to the person you want to quote and ask for their approval.
  • Value for visitors, such as a link to a .pdf file or PowerPoint presentation or article
  • Internal links to other pages on your site, because clicks on these create a higher position in the search engine rankings
  • Picture or graphic for that page
  • Possibly an interactive element, such as a video, or a link to some survey of interests, or a game

Fourth, within this table, write the text that you want on that page. Your text will include “placeholders” in the right spot to show the designer where you want the internal links and the links to value-added information. Your designer can help with comments on your draft.

Then send the designer all your material: site outline, page tables, graphics files, articles, etc.

After the designer incorporates your content into a design with navigation, it is YOUR job to proof all the writing, test all the links, and suggest any changes in the graphic design, tabs and page groupings, navigation, color, font etc. After those changes, you will need to proof and test again.

Allow about two to three months for the entire process. Assume a budget around $2000 to $4000 aside from video production, though actual cost will depend on hours spent by the design firm. You can minimize those hours by doing much of the work yourself (site organization, planning each page, providing ancillary content, making a list of keywords for search engines) and then using the designer to improve it, rather than initiate it.

Finally, you will want to be able to update your site yourself with new information, promotions, or at least to change the copyright year to show that your business is still active. Keeping the content fresh is a big factor with search engines and to keep visitors coming back. Think of your relationship with your visitors as an ongoing dialog. So have the designer write down instructions for adding files and editing content, and maybe even adding pages. Then test your use of them to be sure you understand.

 

Then monitor how well your front door is doing. Check the metrics to see how many visitors you are getting, and where they are coming from. Test where you appear when various search terms are entered in Google or other search engines. Modify as needed, and as your business or the competition changes!

 

Your website is the foundation of your communications. All your other communications efforts draw prospects and customers to the website. So make it a priority, and get the professional expertise to build a site that makes you proud!

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

PrintFriendly and PDFPrint Friendly

Tips for Using Social Media to Market Your Business

by Tom Gray | on Jan 16, 2013 |  Comments

Does the world need yet another article on using Social Media for business? Probably not, but you might find value in a bit of summarization and a few tips from experience.

Social Media is the exchange of user-generated content over the Internet. It is two-way, interactive. Examples include Blogs, Facebook, YouTube, Twitter and many others.

Businesses use Social Media as the receiver.

  • You can monitor what is being said about your industry, your competitors, and your products by signing up for services like Google Alerts and NetVibes.
  • You can respond to customer concerns on Facebook, and with Blog articles.
  • You can even make direct contact with Social Media users who are complaining about competitors, to offer a better solution. For example, see Tweet Me, Friend Me, Make Me Buy – Harvard Business Review

Businesses also use Social Media as the originator primarily to build and maintain relationships, which may blossom into sales. You create some valuable information, and invite people to view it and respond or use it. When they do, you have access to them for future direct or in-group messages. Hopefully, they become a “community” who share some interest, which you help satisfy and maintain by repeatedly offering more value.

What is “valuable information”? It might be techniques, such as Business Techniques in Troubled Times. See Business Techniques in Troubled Times. It could be recipes, or product evaluations. Entertainment – humor – is always welcome. It’s valuable if your target audience thinks it meets some need of theirs, so they decide whether to keep coming back for more. Then, when they are ready to buy what you offer, the relationship ensures that your business will be considered. You don’t “sell.” You maintain a presence by repeatedly offering value.

What Social Media Should You Use?

Many strategies are available. Here is one successful step-by-step approach.

1. Create a Blog linked to your website. Its graphics should be related to those on your website, and every article should end with a mini-bio including your website and email addresses. Post a thoughtful article at least once per week, using a calendar to schedule your topics in advance. You will want to invite people to subscribe to your blog (e-mail marketing), but see below for other ways to distribute your valuable content.

2. Create a Facebook Business Page. Again, there should be some graphic consistency with your website and blog, and links to your website should appear. Add content daily. Post your own blog article once a week, and post other information the other days of the week. Examples are: events you will be attending; issues you are resolving; links to other excellent blog or other media articles; tips for using your product. Facebook is the preferred social media app for many, so you need to be there.

3. Create a LinkedIn profile for business contacts. When you publish your blog, share it on LinkedIn. You can also post your daily Facebook Business Page updates on LinkedIn as status updates, comments, or new discussions.

4. Build Social Media relationships to expand your network. How? Use Facebook to “like” and comment on posts and other blog articles. Offer comments in LinkedIn discussions. Post your comments on those other blogs as well. Endorse the work of colleagues on LinkedIn. Cite and link to other blogs in your own blog articles.

5. “Repurpose” your content. Submit your blog to various blog directories for a wider audience. Do a YouTube video where you describe or demonstrate what you talked about in one of your blog articles. When you post comments on other blogs or Facebook posts or LinkedIn discussions, include a link to your own blog article.

6. If your business is retail, consider using Twitter to inform your community of specials or other items of interest.

7. Make sure your website and your blog and your Facebook business page all have links (via “widgets”) to the various Social Media where you have a presence. Your website designer can do this for you.

Once you get the pieces in place, the time commitment might be as much as three to four hours per week, if you spend two hours writing your blog article and one to two hours reviewing and commenting on other blogs and LinkedIn discussions.

What Content Should You Provide?

This process for developing relationships online only works if you have valuable content to share. How can you be sure of that?

For your Blog, make a list of 20 topics that your customers may find useful. If  your blog is a once per week event, 52 topics would cover the whole year, and you will certainly find more interesting topics as the year goes on and as you keep listening to the buzz about your industry.

Your blog topic list could include how to use your product, issues related to the need your product satisfies, the history of solutions to this need, potential future developments, community issues, social media issues, other useful new products, or upcoming trade shows/exhibits. You want to write only a page or two, maybe 300 to 1000 words, so you don’t need to know or explain everything about the topic! For bigger subjects, plan a series of articles, like this one on effective marketing communications.

You can supplement this list of topics with issues you come across in other blogs, in newspapers and magazines, in LinkedIn discussions, at trade events, and in conversations with customers and friends. Get input about topics from Google Alerts about your industry, or from websites who claim to provide blog topics. See Find Great Blog Topics with these 50 Can’t-Fail Techniques | Copyblogger.

Think about the sequence of topics, and then make a calendar to guide your efforts.

For the content on your Facebook business page, a calendar is again part of the solution. You will want to post daily on this page, so plan to post the same kind of item every week on the same day. For example,

-        Mondays you could post something about your calendar for the week showing what you are working on or where you will be this week, stated in a way that shows how this activity can yield benefits for customers eventually.

-        Tuesdays you could post a comment on an article or blog you saw, and include the link.

-        Wednesdays you could ask a question, perhaps using it as a LinkedIn discussion as well.

-        Thursday might the day your weekly blog posts. It also shows up on this page automatically, because you used the right widget on your blog .

-        Friday is a good time for a comment on something that happened this week.

-        You can always supplement by posting another comment on an article or blog, or re-posting an old blog article of your own, or posting some temporary promotion offer, either yours or some other business’s.

By the way, you can pre-post content and schedule when it appears up to 6 months ahead. See How do I schedule a post to appear on my Page later? | Facebook Help Center | Facebook.

This article defined “value” as the attraction in social media, and “relationships” as the result. Monitor the buzz as a “receiver,” and follow a step-by-step Social Media “origination” strategy. Schedule content for both your blog and your Facebook business page. Build relationships with likes, comments, and discussions. You don’t have to do it all on day one – get started, and see where it leads!

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

 

PrintFriendly and PDFPrint Friendly

Customer Data Base: The Key to Unlocking Revenue

by Tom Gray | on Jan 23, 2013 |  Comments

Your customer information is one of your most important business assets, along with your brand, your website, and your unique way of operating. Customer information is the basis of your relationships, which are themselves the basis of your sales.

Two axioms apply here. One is about your target market and finding new customers: “identify your best customers, and find more like them.”

The other is about sales: “repeat sales (to current customers) require the least effort and the least cost.” Why? Because you don’t have to inform these people that your company exists, or persuade them to believe in the company’s credibility and the product’s value.

New customers and low cost sales are the hallmarks of efficient marketing. Both require that you know the customers you have. Your customer data base captures your knowledge about customers, AND makes it readily-available when needed.

How to Use Your Customer Data Base

If you take a moment to think about how you might use information about customers, then you can design your data base to gather and sort the customer information you need for those purposes. Some common uses are:

1. Communicate with them, strengthening the relationship so they feel valued and buy more.

Your communications will include periodic messages that may vary according to the type of customer (customer relationship management or CRM), perhaps using Constant Contact or AWeber or some other email marketing system. You will also want to be able to send an email blast to all your customers, as well as send targeted messages about promotions designed for those who buy a certain product or volume. “We miss you” messages are designed to re-ignite dormant customers.

- To get customer email address, offer something of value in return, e.g., a discount or coupon, article or ebook.

2. Keep them longer

Those who have bought several products, or several times, are much more likely to continue to do so than those who have not. They become “sticky” customers, resistant to appeals by competitors. A customer data base can capture frequency of purchases, so you can make special efforts to reward those who buy often (e.g. loyalty program), and make special offers to motivate others to move into that category.

3. Find more like them

Profile the segment of your best customers by lifetime purchase volume/revenue, or even lifetime margin. One technique is to define a few categories of customer behavior or value, and place a “category” field in the customer record. Then create marketing programs directed to that profile, your best target market.

4. Forecast revenue from new customers, and focus your marketing accordingly

Your revenue or sales forecast can deal with current customers separately from new customers. You can segment current customers by purchase volume per year, using categories as mentioned above. Each segment will have a different average purchase volume, and possibly a different life cycle as well (weeks, months, or years that they do business with you). For example, for one credit card issuer, the customer life cycle  was 8 years.

When forecasting how many new customers your marketing will generate, you can estimate how many will fall into each of these segments. Then you can forecast revenue from each type of new customer according to the average purchase volume of current customers in that segment. Design your marketing program to achieve these goals, and adjust it if results do not achieve this forecast.

What Information Goes Into Your Customer Data Base?

Once you create a customer record, you can keep it up-to-date manually, or have it updated automatically by integrating it with your Point-of-Sale (POS) or ordering system. Automated updates enable you to store purchase information easily. The table below matches data elements to update method.

Data Element/Update Method

Manual

Either

Automated
Customer number (unchanging)

X

Name and Contact info (include email, birthday)

X

Original Marketing Source (how you heard of us)

X

Date of first order

X

First purchase item

X

Subsequent purchases/revenue

X
Key Upgrades (to a higher level package; loyalty program)

X

Date of key upgrade

X

Cumulative revenue per year

X

Interest categories (check box; design boxes for products)

X

Employees connected to

X

Special events where customer participated

X

Date relationship or contract ended

X

Date of most recent purchase

X

Any critical comments from attitude survey?

X

 

Some tips from experience:

-        Create your own unchanging customer numbers. Don’t use a phone number as customer number, because if the number changes it’s hard to link past behavior under one phone number to current behavior under another number.

-        Key product upgrades may be your criteria to segment your customers. Be sure to make your loyalty program one of these “upgrade” boxes to be checked when they enroll.

-        Interest categories, gathered at sign-up, may influence targeted marketing messages.

-        Employee connections might link a customer to an instructor for a dance studio, or to a special customer service rep.

-        Special events participants may be “sticky” customers; this may be a segmentation criteria.

-        End of contract date can trigger “stay with us” offers, and reveals life cycle.

-        Date of most recent purchase can trigger “come see us again” reminders or offers.

-        Critical comments can guide improvement efforts, and influence targeted messages.

-        Design everything so it can be sorted by a computer. Do not depend on verbatim or notes entries. Instead, anticipate types of entries and set up menu boxes to be checked.

 

How Do We Do This?

The software can be part of your POS or order system, or it can be a MS Access data base, or even Excel spreadsheets. If you use spreadsheets, learn how to use Excel’s “sort” function so you can create lists (reports) with the right contents for various purposes. You may even pre-program commonly-used sorts/reports, as you do with Quickbooks.

Setting up the process for who updates the database, when, and where is critical. An out-of-date data base equals revenue lost and a business flying blind. The owner should be familiar with using the database and extracting reports or sorts. Monthly, review key reports and make sure new customer data is current, when you review your monthly financial results.

The most efficient way to gather the data is to make it part of the order process. Don’t delay data entry for a separate update, because this assures that mistakes will be made! Entry will be deferred too long, data will be misplaced, and transcription errors will occur.

Treat your customer data base as one of your most valuable assets. Design it thoughtfully, according to how you will use the data. Design some reports in advance to help you decide what data you need for each report. Then design the data gathering process and train employees so the information is captured as part of the regular operation of the business. Then use the data to unlock revenues with repeat sales and targeted marketing to attract the most valuable new customers.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

PrintFriendly and PDFPrint Friendly

Getting Started on Your Business Plan

by Tom Gray | on Nov 14, 2012 |  Comments

There are two reasons for writing a Business Plan: to succeed as a business, and to get a loan or equity investment. The first reason means that every new business needs a Business Plan!

A Business Plan Organizes Your Thinking

Entrepreneurs’ minds are a swirling tornado of ideas and questions. A Business Plan organizes these snippets into a logical sequence. Once you have things in order, you can see the holes, the weaknesses, and the inconsistencies.

For example, one inconsistency would be an ambitious sales forecast without a strong marketing campaign. Another would be a strong marketing campaign without a budget to pay for it.

You wouldn’t get very far trying to build a house without a foundation, or trying to put up the roof without first building the walls. The same need for sequence applies to planning a business. Putting it all down on paper enables your mind to focus and fill in the holes.

Start With A Simple Business Plan Outline

Dozens of business plan outlines can be found on the Internet, in bookstores, and in software. SCORE has found over the years that this outline works best for startups:

1.0 Executive Summary (written last)

2.0 Business and Product Description

3.0 The Market

4.0 Marketing Strategy and Tactics

5.0 Operations/Organization

6.0 Financials

The plan will be 10 to 20 pages of text, plus some financial attachments and also some Appendix items, used to add detail to items mentioned in your text.

You write the plan in numbered sections, so it doesn’t seem like a huge task to tackle all at once. As the old saying goes, “How do you eat an elephant?  One bite at a time.” The numbering keeps both you and the reader on track.

Draft the Easy Sections First

The easy sections are Table of Contents (given above), description of the business and products (2.0), and Operations/Organization (5.0).

Entrepreneurs have the most trouble with the Market and Marketing sections, and of course the Financials. So we will cover these in dedicated articles following this one.

You write 1.0 Executive Summary last. It will be a maximum of 2 pages, and should not include any ideas that are not explained in the rest of the text. The best approach is to write summary paragraphs in each of the other sections, and tables in the Financials section, which you copy and paste into 1.0. Then add a few connecting words to make the story flow. This means you really don’t have to write the Executive Summary at all!

Section 2.0: Business Description (2.1) and Product Description (2.2)

Your Business description can be one or two paragraphs. You can use the one below, replacing the underlined items with your own information.

“ABC is an Illinois S corporation owned by your name. It is located at address and established in year. ABC provides (type of) products (or services); as such it is part of the XYZ industry, NAIC Code ####. ABC’s goal is to provide target market segment (e.g. upscale consumers, or steel processors) with type of product or service (e.g. housecleaning) that is your competitive advantage.

In today’s market these target market customers have difficulty meeting this need, because current suppliers do or don’t do what. The benefit to our customers will be what (e.g. save $ per purchase or per year; avoid some problem; achieve some missing satisfaction).”

This will get you started. You can edit this section later, after drafting the others. For example, you may come up with a different competitive edge after writing Section 3.0. If so, you will want to change 2.1 so the whole plan is consistent on this important point.

The NAIC code – North American Industrial Classification – is available online or at a library with a good business section. Ask the reference librarian. It’s used reference databases in order to understand how big the market is, and who your competitors are, both considered in Section 3.0.

Next, write a BRIEF product description (2.2). Limit its length to a half page ideally, or a full page at most. Highlight how it delivers the benefits you promised in 2.1. Don’t get into detail on how it works or how you build the product or deliver the service. Those details, if important, can be described in the Appendix.

Section 5.0: Operations and Organization

This section shows you have “thought through” how to produce the product or deliver the service. It also captures your research on the major cost elements that will later be used for your financials. It will be about two pages long. Use bullet items and/or tables rather than long paragraphs.

  • Start with facilities, software/development, and equipment you will need. Say what they are needed for, and how much they cost.
  • Then list the positions you plan to staff, what their functions are, skills required for each position (to be able to do those functions), and how much they are paid. Be sure to explain what role you will play in operations, and why you will be good at that. Your resume or bio can be in the Appendix.
  • List your professional advisors: Banker, Accountant, Insurance, Lawyer, maybe marketing and computer specialists
  • What skills are missing, how you will get them (outsourcing, advisors), and expected cost
  • Key production processes, if any, can be mentioned here. Longer descriptions or “process maps” (flowcharts) can be in the Appendix.

At this point, it’s a good idea to start a list of what you plan to put in the Appendix, so you don’t forget!

Now you have a framework. Plus you’ve written what you know the most about: your business description, your product or service idea, why it’s good for customers, and how you will make or deliver it. You can always revise these sections later!

This is the first in a series of six articles on the Business Plan. The others help you with the Marketing sections, the Sales Forecast, and the Financials. The last one lists 30 Mistakes to Avoid in Your Business Plan.

This set of articles will be followed by six articles about Marketing Communications (audience/budget, media, website, social media, customer data base), which can be useful in your Business Plan or as standalone techniques.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.

 

PrintFriendly and PDFPrint Friendly

Business Plan Financials – Section 6.0

by Tom Gray | on Dec 12, 2012 |  Comments

Developing realistic and consistent financial forecasts is one of the main purposes of a business plan. Presenting those financials clearly and succinctly is almost as hard as developing them. This article provides some tips for both challenges.

Developing the Financials

Keep a list of the assumptions you make while forecasting financial results, and the source you used. Experienced business plan readers will focus on the accuracy of your assumptions before they even look at your forecasts. If the assumptions don’t seem reasonable, they will stop reading!

  1. Identify all your startup requirements. Research to find likely costs for each.
  2. Make a monthly sales forecast for the first three years. A future article provides detailed advice on this.
  3. Do a Cash Flow Forecast for the first twelve months. This is your tool to figure out how much cash your business needs before it becomes self-supporting. Knowing that, you can determine if you need to borrow money, and if so, how much. See below for direction.
  4. Fourth, decide whether you need investors or a loan. If you need money from others, describe the deal you want. For loans: amount, when received, interest rate, term of loan, monthly payment, date you start making payments. For investments, the deal issues are valuation of the business, who has control, and how investors can sell their stake.
  5. Develop a three year Profit & Loss Statement (P&L or Income Statement). This is just an annual total of revenue, major cost categories, and profit. Copy the first year’s sales and expense data into the P&L from your Cash Flow Forecast. Then estimate two more years. Don’t forget to show loan repayments!
  6. Have your accountant prepare a forecast Balance Sheet for the first three years, using the information from these other forecasts.

Sample forms (spreadsheets) for these forecasts are available many places. For example, at www.scorefoxvalley.org, see the Resources tab, and go to Business Planning.

Why Not Just Use Business Plan Software?

Of course, you could also enter all your estimates into packaged software such as Business Plan Pro. Then all your numbers would cross-foot, but you would not know how they were calculated, because you let the software do it! If you don’t know how they are calculated, you will have a hard time managing them. In a small business where “cash is king,” it’s better to know your numbers intimately if you want your business to succeed.

Monthly Cash Flow Forecast: The Mechanics

Top left: enter cash available before paying for startup costs. Below, enter itemized start-up costs. At bottom, find the cash remaining.

2nd Column top: Cash available BOP (beginning of period) = cash remaining at bottom of prior column. Enter sales revenue, then variable expenses by type, and then fixed or overhead expenses by type. 2nd Column bottom is Cash EOP (end of period) = Cash BOP plus new revenue and minus all those expenses.

This then becomes the 3rd column’s Cash BOP, and so on, just like starting a new page in your checkbook register.

Using the Cash Flow Forecast

Find your “most negative” Cash EOP. It will be your largest negative number, usually the last month before you start to show regular monthly positive cash flow.

Then, increase it by at least 15% or so, as a “contingency” for unknown costs. This is your protection for not knowing the future perfectly!

The result is the amount of cash you need to start the business. Figure out where to get it. Bank loans are feasible only if you have collateral and you yourself can put up about 25% of the amount needed. Microloans are also a possibility. Now go back to item 4 above: define the deal you want if you need a loan. Note: 70% of startups use their own savings as the main source of their funding, according to the Ewing Marion Kauffman Foundation quoted in the Wall Street Journal November 12, 2012.

Presenting the Financials in Your Plan

Your forecasts will be on spreadsheets attached to the Business Plan. Use five sections to present that information in your plan:

  • 6.1 Projected Results

Present a table with 3 years of data for unit sales, revenue, variable cost, gross margin, overhead, loan repayment (if any) and profit. Precede the table with some words explaining the conclusion you want the reader to draw from reading the table. You’ll copy this into the Executive Summary.

  • 6.2 Milestones

List the expected dates for major events in business success, such as first sale, first cash flow positive month, first 100 customers, add some facility or staff, etc. Both you and lenders can use these as objectives to measure progress and success.

  • 6.3 Financial Requirements: The Deal

State the loan or investment you need, the terms you have assumed, and when you expect to begin repayment. Then point to key financials in the 6.1 table to show that there will be ample funds available to repay the loan. Copy/paste this into the Executive Summary.

  • 6.4 Key Assumptions

List five to ten assumptions crucial to the most important revenue and expense items. These assumptions must be reasonable for the rest of your plan to be credible.

  • 6.5 Risks and Mitigation

List two to four things that could go wrong and have serious impact on your forecasts. Identify the profit impact for each one (you can re-run your spreadsheets with the bad event replacing your original estimates). Then state your plan to prevent the risk, and to minimize its financial impact if it does occur. This shows you are realistic, not just blindly hopeful!

Now re-read and edit the plan to make sure all the parts, numbers, and assumptions are consistent.

Then, create 1.0 Executive Summary by copy/paste of summary paragraphs from the important sections. Add a few transition words to link them all into a nice 2 page narrative, and you’re done!

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

 

 

PrintFriendly and PDFPrint Friendly

Thirty Mistakes to Avoid in Your Business Plan

by Tom Gray | on Dec 19, 2012 |  Comments

If you want yourself and your business concept to be taken seriously, avoid these commonly-seen mistakes in your business plan.

Unrealistic Assumptions

1. Market share too high for a startup, e.g. 10%

2. Starting three lines of business at once, rather than succeeding at one before launching the next

3. “A low price is the only differentiation I need”

4. “I can personally produce professional-appearing website and marketing materials”

5. Sales Forecast grows at unrealistic pace, uses most of the time of the owner, assumes customers pay right away, and has no source/model from a currently operating business in a similar field

6. No salary for owner is shown in fixed overhead expenses

7. Marketing budget is too low

8. IT budget is too low

9. No “contingency” for unknowns is considered  in the Cash Flow Forecast

10. Risks are not presented and discussed

11.  “I can get a loan without collateral and without investing 20-30% of amount needed myself”

12. Timelines assume everything goes well and everyone cooperates according to your desires

 

Incomplete Analysis

13. “I have no competition”

14. Your plans for the 4 P’s do not support the Positioning you chose

15. Buying new equipment when used versions or leases are available.

16. Failure to plan to buy software for bookkeeping, customer data base, order processing, inventory, etc.

17. No recognition or description of key operations processes (hint: if you include flowcharts of these processes in the Appendix, you will really stand out as a disciplined planner)

18. Price is too low; contribution (gross) margin is too low; profit is less than 15% at maturity

19. Financials do not include loan repayment!

20. Risks are not described and assessed

21. No recognition of key skills that are missing or no plan to obtain them

22. Owner plans to spend almost all of his or her time in operating the production of goods/services, rather than managing the business

23. Unrealistic timeline to launch, especially if driven by acquiring a particular store location

 

Confusing Presentation

24. No page numbers; no outline or section numbers

25. No “deal” statement

26. Inconsistencies: text contradicts itself; tables or financials don’t add up

27. No milestones offered

28. Financials not summed up into a small table

29. Executive Summary is “creative writing” rather than a summary of the text that follows, or is longer than two pages

30. Pages and pages of beliefs, philosophies, and values rather than practical tactics for succeeding in business

 

What is the Reader Looking For?

Businesses fail because their differentiation is weak or absent, they fail to communicate it to the target audience (marketing), or they run out of cash before enough prospects hear the message. So your reader is looking for

  • Clear and strong differentiation in meeting a known market need
  • Effective marketing plan: message, money, media, timing
  • Reasonable sales, cost, margin, and cash flow estimates: not too optimistic
  • Plans to obtain adequate financing
  • Indications that the owner is a good investment: he or she understands how to organize and manage a business, deal with customers, carry out plans as scheduled, keep records, and pay back debts

So write a plan that’s as accurate and disciplined as you yourself must be to succeed as an entrepreneur! If you need help, contact SCORE – they’ve seen it all before. www.score.org

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

 

 

PrintFriendly and PDFPrint Friendly

Using Customer Data Base Reports

by Tom Gray | on Jan 30, 2013 |  Comments

The previous article on the Customer Data Base recommended designing some reports before you design the data base, to help you single out the types of data you will want to store in the data base. This article provides guidance on how to do that.

What Reports Might be Useful?

What if you had all the information you needed to “wow” your customers with individualized communications addressed to their needs and showing how important their relationship is to your company? Sales would jump. Customers would stay, and come back to buy again. Your marketing would be efficient and well as effective.

Stay in this dream for the moment, and figure out what IS “all the information you need” about your customers. How would you organize it into reports or lists for specific purposes? The table below offers some ideas.

By the way, you’ll see the term “sticky” in the table. Sticky customers are loyal to your company, as shown by their purchase of multiple products or services from you. The more different things they buy from you, the harder it is for a competitor to take your place, because that switch becomes more disruptive as the customer becomes more dependent on his relationship with you. Sticky customers may also be your most profitable customers, because their new purchases require less marketing effort. They already know and value your business. They are repeat customers. So you want to create more of them!

Report

Purpose
Customer List Basic List; number, contact info, start date, annual revenue
Sticky Customer List Most secure customers; find more like them; move others into this   list with targeted promotions; show upgrades, events, loyalty club, annual   revenue
Dormant Customer List Revenue opportunities; stimulate buys with targeted promotions;   survey for attitude changes
Email list For email blasts to all customers
Customers by Revenue Most valuable customers; enables segmentation and targeted promotions
New Customers (by year) Target list to achieve sticky status; anniversary promotion
Birthday list (by month) Spur sales with targeted promotion
Contracts Expiring Soon (choose date) Revenue risk; renew them with targeted promotion
Key Upgrade List Most valuable customers; upgrade = status; reveals sticky customers;   enables segmentation
Interest List May trigger ideas for targeted promotion to boost revenue
Employee Connection List Communications to strengthen relationship; establish employee   connections to create sticky relationships
Event Participation List Promote your next event to them; candidates for sticky status
Critical Commentors List Make sure they receive feedback; offer special promotion; monitor   their attitude

 

Designing Reports

Simple reports have a clear purpose, only one primary data element used for sorting (also called sort field or sort criteria), and include additional data elements to enable the user to carry out the report’s purpose. Simple reports use only one line per customer, and that line fits on one page, either vertical (portrait layout) or horizontal (landscape layout).

Let’s say you want a key upgrade list. Your key upgrades are bronze, silver, and gold product packages or status. In thinking about the sorting, you realize that sorting on three different data elements to make a single list is beyond your capabilities – you need a single data element for sorting.

So you design the data base to have a “customer package” data element, with valid entries being 3 for gold, 2 for silver, 1 for bronze, and 0 for those who bought a standalone service rather than a package.  This enables you to print a customer list organized in descending numeric order for this data element, showing your gold customers first, then silver, etc.

Next you decide what other data you want to see on the customer line in this report. Loyalty program membership will be one. Another will be annual purchase volume. Dates of most recent purchase and contract purchase/expiration will be useful. And of course customer number, and perhaps employee connection and/or email address.

Now you can send emails to encourage renewal or upgrades, and your message can be targeted to recognize the customer’s current status. Customers appreciate it when you understand the nature of the customer’s relationship with the business, so use this method to get the best success rate for your marketing effort.

Give it a try. Design some reports, and then make sure the data is stored in ways that enable the reports you designed. With experience you may decide to change some of the formats, especially the additional data elements to be printed on each line.

The important thing is to set up the right data elements at the outset in a way that can be sorted, because you don’t want to go back and update the entire data base to add a new data element for all your customers!

With the right customer information at your fingertips in well-designed reports, your marketing can be both efficient and effective!

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

PrintFriendly and PDFPrint Friendly

Profit Assessment: Is My Business Worth Doing?

by Tom Gray | on Feb 13, 2013 |  Comments

How much are you putting into your business, and what are you getting out of it in return? Could you get the same profit from another activity with less effort or risk?

Stop and reflect, look in the mirror, and answer that difficult question that maybe your spouse has been or will be asking too. “Why are you doing this (to yourself)?” Is following your dream a good idea financially? Will people pay you “enough” for working on what you are passionate about? How much is “enough?”

Comparison: “Returns” available to consumers making financial investments

“Return” is shorthand for “return on investment,” the profit opportunity that compensates for the risk of making an investment. Financial investments can provide returns or profits of 3 to 10% without many hours of effort. Typical returns available to “little guy” investors:

  • 3-4% return on an A-rated corporate bond; hardly any risk.
  • 9-10% return on the S&P 500 stocks since 1900 (lots less since 2000, but more since 2009); some risk, but if you diversify and do not buy/sell on dips, you have a good chance of earning this return.
  • 6.5% return on a portfolio that is weighted 50/50 for the above two investment types.

You can get these returns by making a few phone calls and getting some good advice. You’ll also need to spend a couple hours per month evaluating how you’re doing. Yes, there is risk – mostly with stocks and with bond funds rather than bonds held to maturity. But there is risk when you invest in a small business too. Which has greater risk: your local bakery, or a Fortune 500 company with lots of resources?

Your Compensation: Salary plus Return for Risked Capital

Now compare these profits from investing with the profits available from your small business. You spend at least 60 hours per week on your small business, and you can never be sure you’ll have enough cash to keep the doors open and the staff paid. For that kind of effort and risk, what return makes it worthwhile? The answer has two parts: the value of your time, and the risk of investing your money.

  • You should be paid for your time as much as someone else would pay you, net of taxes. Not the best salary you ever had, but the one you could get today if you seriously tried but did not hit the jackpot. This is the value of your time.
    • Assume your net pay is 2/3 your gross. If the salary is $60,000, the net is $40,000, or about $20/hour for 40 hours/week.
    • Don’t get caught up in counting hours at your own company vs. the one you work for – just figure they are both full-time jobs. The extra hours you put into your own business are the trade-off for the benefits of being your own boss, working close to home, avoiding office politics etc.
    • You should be paid for your risk as well. You should earn a return on your invested cash and the loans you have agreed to pay back. You should expect a higher return for greater risk.
      • Remember that investing in a Fortune 500 company earns you 10% return. Now compare the risk of that company vs. your small company that is chronically challenged to find cash and customers. Your greater risk should be worth a higher return. Aside from salary, you should earn at least 15%, maybe 20%, on the cash you invested in your business.

Here’s an example.

Susan was laid off from a $90,000/year job. She thinks she could make $60,000 as an office manager somewhere, which is $40,000 net. Instead, she wants to open her own boutique in her town. The business plan calls for her to invest $50,000 cash, and take out business loan (personally-guaranteed) of $150,000. What should she earn from her business to make it worth the effort?

When the business is mature (perhaps in year three), her salary should net her $40,000 based on her own market value as an employee, and the business profits should be another $40,000, based on 200K invested x 20% return for risk.

What If Your Business or Business Plan Falls Short?

The profit assessment is a trigger to action! It makes you review of the ways you could increase profits. Here are two:

  • Many new business owners are not sure what price level to choose. This compensation target gives them direction, so they don’t price too low, which is a very common error we see in business plans.
  • The other big unknown for a startup is the sales forecast. Your compensation target can help you figure out how many sales you need. Then you can design a sales force and a marketing plan to get there.

Next week’s article explores the different ways to grow your business, and how long they take to produce cash results.

Try this out – figure how much profit you should be making. Then share your comments on what you learned from it, and where you will go from here.

 

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

PrintFriendly and PDFPrint Friendly

The Business Growth Machine

by Tom Gray | on Feb 17, 2013 |  Comments

Imagine yourself as the operator of a business growth machine, with dials to show changes in key business results, and lots of levers that enable you to cause those changes. You are the “great and powerful Oz” – the small business owner! Which levers should you pull first, and when will the results change?

Growth Techniques – Labels on Levers

Start with reading the labels on the levers. What are the techniques for growing?

Why does everyone want to grow their business? They want more profits (and less stress).They know that a bigger business means one with more revenue, yielding more gross (contribution) margin after variable costs. If overhead does not grow, then that extra gross margin becomes profit.

If growing profit is the goal, then our search for how to grow the business goes beyond increasing revenue. It also includes cost control and even additional investments to enable more profits.

This means you have three rows of levers: one row for revenue, one set for cost control, and one row for investment. Each row contains several levers. For example, the revenue row levers are:

  • Raise price
  • Temporary promotion
  • More repeat sales
  • Higher purchase amount per sale
  • New customers
  • New product
  • New market

Your cost control set has an upper row of levers for variable cost, and a lower row for fixed costs of overhead. The machine maker placed variable above fixed so it would match your income statement! Your lever layout looks like this:

Cost Control

Variable Cost

Fixed Cost
  •   Labor hours
  •   Labor wages
  •   Labor benefits
  •   Material amount
  •   Material cost
  •   Subcontractors
  •   Shipping
  •   Sales commission
  •    % nonproductive labor
  •   Rent
  •   Marketing
  •   Office supplies/misc.
  •   Your salary/benefits
  •   Professional services*
  •   IT systems
  •   Interest
  •   More!

*Professional services includes consultants, lawyer, accountant, other outside services

In the third row – the investment row – all the levers have red handles. The machine-maker’s lawyer even insisted on a warning label: “Use with caution! Misuse could destroy profits!” These levers include:

  • Equipment — Buy a new machine (equipment financing)
  • Leasehold improvements — invest in improving the appearance of your location
  • Loan — Borrow more
  • Sell equity — give a up a percentage of ownership in return for cash investment
  • Acquire – buy another business
  • Divest — Sell a part of your business to get cash to invest in growth
  • Dispose – Junk and write-off facilities or equipment not generating profits
  • New Venture – build a new business, such as a new product or new market

Which Levers to Operate — What To Do Now?

Having unpacked this beautiful machine, you can’t wait to start pulling levers. But first a wise advisor (maybe a spouse) suggests you check out the instructions. In the owner’s manual you find this paragraph:

“Dear Great and Powerful Business Growth Machine Operator, Please be aware that some levers have immediate effects on results, yet others have delayed impact. Also, the amount of growth caused by any lever depends on the external environment and the reactions of independent variables (e.g. people). If people do not do what you or the machine designer expect, the results will not be what you expect.”

This means you need to think about each lever. After you pull it, when can you expect results (machine dials) to show a change, and how much change, when it finally happens?

If you’re in a hurry for growth (and who isn’t?), you won’t take time to read each lever’s section. Instead, you’ll jump right to “lever impact timing” table. Here it is:

Quartile

Speed   of Cash Impact

Lever   or Technique

1st

 Lickety-split (“Quick Wins”):

0 to 1 month

 

 Raise price, cut cost, decide not to spend investment

2nd

 Pretty fast:

1 to 3 months

 Stimulate repeat purchases; motivate higher amount per buy

3rd

 Serious effort:

3 to 12 months

 New customers; new distribution channels

4th

 Long slog:

1 to 3 years

 New product; new market

 

Do you see it differently? Do some of these levers take longer, or have results faster? Leave a comment!

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

PrintFriendly and PDFPrint Friendly

Business Growth Techniques: Fast or Slow

by Tom Gray | on Feb 27, 2013 |  Comments

As you decide which lever to use to grow your business, you’ll be thinking about what could go wrong as well as dreaming about success. You do want some noticeable gains soon. You don’t want a major effort for a minor or temporary gain. You don’t want a major risk if smaller steps can deliver the same value. Let’s consider first the idea of “noticeable gains soon.”

The previous article imagined a “business growth machine” operated by the great and powerful small business owner. See The Business Growth Machine. The machine’s manual described each lever for business growth, but it also offered this caution about the speed of results from various levers:

Quartile

Speed   of Cash Impact

Lever   or Technique

1st

 Lickety-split (“Quick Wins”):0 to 1 month Raise price, cut cost, decide not to spend investment

2nd

 Pretty fast:1 to 3 months Stimulate repeat purchases; motivate higher amount per buy

3rd

 Serious effort:3 to 12 months New customers; new distribution channels

4th

 Long slog:1 to 3 years New product; new market

 

“Quick Wins”: You Have Control

Why do “lickety-split” (also called “Quick Win”) levers raise your profits almost right away? If you look inside your growth machine for these quick win levers, you’ll see simple and direct connections between the decision lever and the output gizmo. The owner decides, and it is done. Nothing is simpler than refusing to spend cash. You don’t need an owner’s manual for that! And raising a price has some risk, but it’s easy to do. For quick wins, implementation does not depend on others, and results are fairly predictable, especially if the moves are small.

You can sum it up with the word “Control.” The owner controls implementation, and the outcome is under control as well. Also, if you have control, you can more easily “change the change” if you don’t like the results.

In the above table, the owner’s control of implementation and the predictability of results both decline in the lower categories. Maybe that’s why they take longer to show results. But there are other reasons too.

“Pretty Fast”: Complexity and Skill Requirements = Slower and Less Certain Results

When the owner cannot make it happen by declaring or giving orders, the lever involves some complexity. There are gizmos behind the lever to cause other gizmos to operate, so the outcome is more indirect. Anything indirect is harder to manage: harder to implement; harder to predict; harder to program. This mean successful implementation takes more skill, and it also seems to take more time.

For example, consider the second row in the table: the “pretty fast” levers. To stimulate repeat purchases, the owner/machine creates a loyalty club and promotes it to customers in the customer database. This is more complex than raising price, because you or the machine must

  • Create the loyalty club rules to fit the target customers
  • Make sure you have a customer database so you know who to contact and how
  • Create a communications message and use media to pass the word
  • Then customers must pay attention to the message, find it compelling, and return to buy more

Even if you already have an adequate customer database (see Customer Data Base: The Key to Unlocking Revenue and Using Customer Data Base Reports), three months can easily elapse before you see more revenue. The same kind of multi-step complexity affects your plans to get buyers to buy more in each purchase.

The complexity adds time. The other dimension is skill. The results you seek only happen if you have the skill to do each of these steps well. To the extent your efforts fall short of the optimum, your results will fall short as well. Unlike the quick wins, it’s harder to predict the revenue effect of these “pretty fast” techniques or levers because they are harder to implement. As more complexity and skill are needed, control of results is less certain.

“Serious Effort”: More Variables and Limited Knowledge = Even More Delay and Uncertainty

When you move away from prices/costs you control, and customers you know, the risk of failure rises. You may do all that seems necessary and do it well (complexity and skills), but you may be doing the wrong things well if you don’t know what motivates new customers or new distributors. Hopefully the designer of your business growth machine (that would be you!) links the levers to the right gizmos, but if not, garbage in = garbage out.

The “serious effort” levers take longer, as much as 3 to 12 months, because you need to learn about new types of people and negotiate with them. You need to understand why prospects are not already customers. You have to find out what distributors are available, what kind of supplier they want to work with, and become that kind of company (see Finding Distributors). In both cases, you must then find new ways to get their attention, express your benefits, and make a deal.

“Long Slog”: New Products and New Markets Have the Most Unknowns

The riskiest and most uncertain lever, which also has a red handle, is a new product introduced to a new market. This is close to launching a new business, and the norm for a new business to reach cash breakeven is some time in the second year.

However, you can reduce risk and increase control by cutting the variables in half. A new product for current customers has lower risk because you already know their needs and how to reach them, and they already listen to you. This leaves only the product development risk.

A new market for an existing product has less risk because the product is known. Your challenge is only to understand how to reach and be heard by the new market. If it is a new geographic area for the same type of customer you are already serving elsewhere, the unknowns/risks become even smaller.

Still, the learning and the many steps and skills involved with these techniques suggest that you won’t see gains in profits for one to three years. It may feel like a “long slog.” The projected profit gains may be large, but so is the uncertainty.

In sum, you will experience increases in time required, uncertainty of results, and risk of failure as you move along this chain:

Operations you control

Current customers/current products

New customers/old channels/current products

New customers/new channels/current products

Old customers/new products

New customers/old products

New customers/new products

Which levers will you pull first? 

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

PrintFriendly and PDFPrint Friendly

Grow Quick with “Quick Wins”

by Tom Gray | on Mar 06, 2013 |  Comments

The ideal business growth project delivers higher cash flow within 30 days. The increase is sustainable for months to come, it can be done within current resources, and you can stop it easily if it does not work out. If it’s ideal, it also generates more customer loyalty and better employee morale. Does that sound like heaven on earth? It’s a quick win. Where can you find one?

Hunting for Quick Wins

You don’t have to look far. Take 15 minutes and think about:

  • What would happen if I raised my price 5%? Would less than 5% of my customers leave?
  • What items do I pay for regularly that do not benefit my customers or my operations? Can we do without them? Examples: supplies, dues, donations, overuse of legal or accounting or consultant services, fees paid to payroll companies.
  • What costs could I replace by using readily-available technology? Example: replace answering service with voice mail.
  • Do I use suppliers with whom I have never tried to negotiate better terms, or who I have not tried to replace recently? Example: supplies vendors, insurance, professional services, printing, computer maintenance.
  • Can I order those materials or run that marketing program every two months rather than monthly with no negative impact on the business?
  • What problems do we regularly work around? If I did it differently, would employees or customers appreciate the change?

Small Price Increase

If customers value your offering, a small price increase will not change their behavior, but can have a tenfold effect on cash flow: a 5% increase in price can boost profit from 10% to 15%, a 50% increase. See Pricing Tips: Start High; Big Results from Small Changes

Review the Expenses in the P&L

Use the detailed version of the Quickbooks P&L (Profit and Loss) report for the last quarter to see all your payments organized by supplier. Do you need that water service, or dues? Are you overusing professional advisors? Can you use your phone system or the internet better? Is there an office machine that can eliminate an outside supplier? One client saved as much as 20% of payroll by canceling these types of spending.

Negotiating with traditional suppliers is another fruitful area. Call and ask for a discount, or ask if they have a different package that might meet your needs better. Offer to commit to a standing order for a lower price. Meanwhile, contact a few alternatives to see if they have a better offer – new customers are the goal of every business, so they may get the best offers. You can mention these alternatives when negotiating with your current supplier. One client got a 20% price reduction with a shorter contract length by “pushing back” on an initial offer.

Timing can be another quick win. Less frequent use of a monthly marketing program reduces cash outflow.  You may also find ways to change the timing of payments so they fall into non-payroll weeks (rent), or are spread more evenly through the year (utilities).

Process improvements can take longer to implement than 30 days, but they can result in major cash flow improvements. See Process Improvement for three articles on several techniques.

Wages can be another fruitful field. Can you reduce hours of operation? What percent of staff time is not spent on customer work? Can you use that extra time to provide a customer benefit such as product maintenance? If you did not have a particular support person, could you change operations so there was no major impact? Have you checked www.salary.com to see if you are paying more than the average for that job title in your area? One client was paying twice as much as the prevailing wage for one position, and also found a way to cut hours of operation by 20%.

Are there products or services where the margin is less than half the price? If so, change the price, or reduce the cost, or cancel the product/service, or bundle it into a higher priced package. See Product and Service Bundles: Product Strategy and Pricing Technique: Good, Better, Best.

Satisfaction Boosters

What problems do your staff or your customers work around every day? If you fix the problem, will employee morale and/or customer satisfaction improve? If so, the result should be better retention, better productivity, and happier customers who stay with you and even buy more.

Maybe it’s a facility issue, like fixing a leaky roof, or painting, or moving furniture, or adding a postage machine. Maybe it’s a process with too many steps. Maybe you require higher level approvals where you could trust your employees more. Maybe you could solicit staff input more often. Maybe you could use your office system to provide standard reports rather than interrupting to ask for status.

The Key to Quick Wins

Quick wins are the fastest way to business growth. See The Business Growth Machine and Business Growth Techniques: Fast or Slow

Quick wins boost morale and cash flow. To find them, you just need to step back from the day-to-day grind and think about the business anew, as an outsider would. If you were starting over, would you change the way you do things? If so, find a way to change now!

Help our readers! Can you suggest some quick wins that worked for you?

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com

 

PrintFriendly and PDFPrint Friendly

Small Nonprofit with Big Ideas: Opening Day for Play Global!

by Tom Gray | on Mar 12, 2013 |  Comments

Do kids in Uganda need to throw fast balls? Do teams in Moldova need catchers’ gear? Play Global! believes they do.  Play Global! is a new nonprofit organization that aims to bring baseball to youth in developing countries and conflict areas. It uses the baseball experience to teach teamwork, respect, and life skills.

The Concept

As a former employee of Major League Baseball in Europe and as a scout for the Pittsburgh Pirates, founder Tom Gillespie has seen first-hand how baseball can impact the lives of kids who have never played it before. Working in communities in Eastern Europe and sub-Saharan Africa, he started to see the baseball diamond as a place where the inequalities that exist off the field don’t matter. While each neighborhood or ethnic group might already have allegiances for familiar sports like soccer, a new game like baseball can bring together participants with cultural, religious, gender, and socio-economic differences.

“I’ve seen the determination that new players have to hit the ball, and the joy in their eyes the first time the ball sticks in their glove,” Gillespie explains. “Even more rewarding is when teammates – who didn’t know each other 24 hours ago – start helping each other to understand the rules or improve their technique. The players are IN that moment. Language doesn’t matter, gender doesn’t matter. Baseball engenders respect and teamwork when it’s taught well, and we want to utilize that in a positive and productive way.”

The Nonprofit Business Model

Gillespie decided to carry on this work outside the MLB umbrella. Considering the lack of resources in host countries who could benefit the most from Tom’s concept, he realized the nonprofit model was the best fit for the mission.

Nonprofit organizations are unique because their revenue source is separate from their clientele. Play Global! appeals to individual donors and foundations to raise money, but relies on personal networks, referrals and the quality of programming in order to connect with host sites.

Living in Hamburg, one of northern Germany’s largest cities, Tom sought out his fellow American and longtime friend Julia McCarthy for her experience in nonprofit administration. Julia lives in Hannover, another northern German city. Together they began to create a business plan.

The Business Plan

Tom and Julia wanted to base the organization in the USA, to make it easy to reach and work with a donor base familiar with baseball.

They incorporated Play Global! as a nonprofit organization based in Illinois but operating internationally. Over several months, they developed a business plan, applied for tax-exempt status with the IRS, recruited a Board of Directors, and refined the model for their programs.

They used the Business Plan process over several months to shape the concept into a reality. “It was like a snowball rolling down a hill,” Julia said. “We started with an interesting idea to take what we do well and bring it to those around the world who could really benefit. We picked a name, drafted our mission statement, and then incorporated in Illinois via the Internet.

“Then we realized that our plan needed to fit the interests of donors as well as the needs of our host countries, so we analyzed the market and developed marketing tactics for both. We also knew that a solid program model would speak for itself and appeal to all our audiences. Once we started planning, our idea picked up speed and grew into an organization.”

Recognizing the need for a strong board of directors, they recruited directors experienced in the US baseball coaching arena, international baseball, and nonprofit administration, plus an SCORE advisor for business startups.

“The board has been very involved from day one,” recalls Julia. “They have helped us to develop the organization’s structure so that we are ready to grow. They really keep us on track.”

Ready for Launch: “Opening Day”

While working on the Plan, Julia developed communication plans and website content, filed for tax-exempt status with the IRS, arranged the donation and banking process, and set up accounting. Tom provided content, coordinated logo design, designed the coaching/clinic methodology, and reached out to host countries regarding pilot programs. Meanwhile one of the Board members found the first major donor opportunity!

By March 2013, Play Global! was ready to launch. Emails, Facebook, and LinkedIn messages hit cyberspace beginning March 7, and the new nonprofit was on its way!

Challenges Ahead

While Play Global! is off to a strong start, challenges lie ahead. In order to solicit grants and make donations tax-deductible, the organization’s application for tax-exempt status must be approved by the IRS. That process can take several months.

While Gillespie and McCarthy recognize that evaluating outcomes is crucial to program success, lessons about teamwork, respect, and conflict-resolution are difficult to quantify. Along with board members, they are working to develop tools to evaluate not only how many people participate in baseball camps and clinics, but whether the experience has helped them learn skills for success in adulthood.

Support Play Global!

Learn more about Play Global! by visiting www.play-global.org and following them on LinkedIn and Facebook. Get involved by donating to their work in any amount. Your donation can help that kid in Uganda learn to throw a better fast ball, and then teach his teammates to do the same.

Tom Gray helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com.

 

PrintFriendly and PDFPrint Friendly
Page 1 of 1112345...10...Last »