Startup Boot Camp
Kick Starting Success for
California’s Retail, Restaurant and
Service Entrepreneurs!
Day 1 — Session 2
MARKET RESEARCH
Market Research
It’s not what:– You like
– I like
– Your neighbor likes
– Your spouse or partner likes
– Your dog likes
It must be:– Independent
– Factual
– Quantitative
– Timely
―The aim of marketing is to know and
understand the customer so well the
product or service fits him and sells itself.‖
— Peter Drucker
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Types Of Market Research
Primary Research – talk to the customer:– Focus groups
– Mall intercept studies – ―exit‖ interviews
– Zoomerang & Survey Monkey for the web
– Telephone surveys
– Customer interviews
Secondary Research – data collected by someone else– Internet
– Libraries/research librarians
Observe what the competition is doing– Tradeshows
– Trade publications
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Uses Of Market Research
Validate business concept or marketable idea– Determine the size, current state, growth potential and trends in
your industry
– Identify other products/services that potential customers buy
instead of yours for the same purpose
Information to modify/improve the product– Product line extensions
– New categories
Refine your message to your customer
Identify your consumer
5
Consider . . .
Assessing, adjusting, adapting to the market are a constant
in a successful business!
When do you stop doing Market Research: Never!
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Example
Assume you want to start a retail store that sells pellet
stoves as described below. Take out a blank piece of
paper and write down 5 potential sources of information
on the market and customer for this product:
What is a pellet stove?
It produces relatively clean heat by burning
small cylinders of compressed saw dust. It
is self-igniting, controlled by a thermostat
and can be equipped with a battery
backup. It is useful as a home heating
source and particularly useful where power
may be subject to disruptions.
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Example (cont’d)
Trade Association - Yes– Hearth, Patio & Barbeque Association
Trade Show – Yes– Hearth, Patio & Barbeque Expo
Trade Publications? Yes– Biomass Magazine
– Backwoods Home Magazine
Newsletters? Yes– off-grid.net
Company SEC filings, Industry Reports, Articles, Retail
Store visits, etc., etc., etc.
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Learn More About Your Customer
Take out a sheet of paper and write ―customer‖ on it.
Take 3 minutes and identify sources or ways in which
you can use primary or secondary research to validate
your ideas or find out more about your customer and
market.
Now, do the same for your product/service
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Examples of Market Information
SBDCnet — Speak with your SBDC Business Advisor
Examples of Market Research Sources:– Business Stats: http://www.bizstats.com
– General Demographics:
http://factfinder2.census.gov/faces/nav/jsf/pages/index.xhtml
– City Information: www.city-data.com
– Segmentation overview:
http://www.netmba.com/marketing/market/segmentation/
Reference Librarians
Tradeshows/Trade Publications
Your Competitors
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COMPETITION
―I have been up against tough
competition all my life. I wouldn't
know how to get along without it.‖
– Walt Disney
Types Of Competition
How do you define your competition:– Direct (e.g., McDonald’s vs. Burger King)
– Indirect (e.g., McDonald’s vs. Subway)
Online vs. Offline
New or well entrenched
Always consider current and future competition
Be vigilant for new market entrants
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Competition As An Advantage
Don’t view your competition as a threat
They’ve already done some work for you. Learn from
them/from their mistakes
How do they market? Why?
Who is their target customer (remember the bike shop)?
Is information available on their cost structure?
Learn from industry consultants — industry events
Network
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Competitive Advantage
Competitive advantage occurs when an organization
acquires or develops an attribute or combination of
attributes that allows it to outperform its competitors.
To achieve a sustainable competitive advantage you
must:– Operate at a consistently lower cost, or
– Command a premium price
Cost/price advantages can be achieved in two ways:– Do what your competition does better/cheaper
– Do things differently from your competitors – in a way that delivers a
unique type of value to your target customer
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What Will Make You Special?
Location
Free delivery
Quick turnaround
Customization
Convenient hours
Unique product/skills
Customer support
―Number one, cash is king... number two,
communicate... number three, buy or bury
the competition.‖
– Jack Welch
Note: This is a list of features.
Remember the discussion of features
vs. benefits.
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Competitive Analysis
Use many of the same techniques and resources as
Market Analysis– For locally based businesses visit/observe your competition
• How many are there?
• How do they market/sell? To who?
• What products do they carry or services do they offer?
• What do they charge?
• How busy are they?
Use tools like SBDCnet
Create a competitive matrix―You can observe a lot
just by watching.‖
— Yogi Berra
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Competitive Matrix
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Example
Take 5 minutes and on a blank sheet of paper, identify
competition for:
Is it direct? Indirect? Online?
List 5 things this business can do to create a competitive
advantage?
A hardware store
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Example (cont’d)
Direct– Other local hardware stores
– Big box stores like Home Depot/Lowes
– Internet retailers of hardware products
Indirect– Contractors
Potential items of competitive advantage– Location, contractor specials/discounts, specific products, inventory
levels, parking, hours, helpful staff, etc., etc., etc.,
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IP As A Competitive Advantage
Intellectual Property (IP) can be a very valuable asset
Trademark: any word, name, symbol, or device, (or any
combination thereof) used to identify and distinguish
goods or services and to indicate their source
Word Marks: KODAK
Design Marks:
Composite Marks containing
both words and design:
Slogans: WE BRING GOOD THINGS TO LIFE
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IP As A Competitive Advantage
Types of Trademark registration– Common Law – unregistered; derived from use ―TM‖ in marketing materials
– State Registration – the ―truly local.‖ Registered with one or more U.S.
states
– Federal Registration® - interstate commerce or between the U.S. and
another country
Federal registration is not required, because trademark
rights (in the U.S.) arise from use on or in connection with
goods or services, but there may be advantages to federal
registration
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Who’s Your Competition?
On a sheet of paper, identify your direct and indirect
competitors
Identify 3 ways you can find out information about them
What’s your competitive advantage? Why will people buy
from you?
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PRICING
―You can have anything in this world you
want, if you want it badly enough and
you're willing to pay the price.‖
– Mary Kay Ash
Only Ways To Make More Money
Sell more
Cut costs
Raise your price
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Pricing Strategies
Must make sense given the:– Markets served/target customer
– Products/services offered
– Operational costs/method of distribution
– Competition/perceived competitive advantage
Only 3 strategic choices:– Premium
– Market
– Value
Many pricing options:– Suggested retail
– Volume discounting
– Wholesale pricing
– Cash and early payment discounts
– Seasonal pricing
– Price flexibility
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Determining Prices
No magic bullet
Based on the interplay of a number of factors– Who’s your target market
– Your positioning (premium, market, value)
– What competition charges for similar product/services
– Your perceived ―value‖ to your customer (your ―value proposition‖)
– Your objective• Obtain market share
• Maximize profits
• Maximize revenue
– Your cost structure• Fixed overhead
• Cost of goods sold
• Profitability/target gross margin
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Pricing Is Key
An ineffective pricing strategy is one of they key failures
of small business
Businesses must price to cover the direct costs of
production, variable overhead, fixed overhead, owner
wages, and profit — more on this tomorrow
After businesses know what they want/need to charge,
how does it ―fit‖ their market?
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Basic Pricing Strategies
Cost-plus pricing– Adding a standard markup to the cost of the product.
– Popular because:• Sellers more certain about cost than demand
• Simplifies pricing
• When all sellers use, prices are similar and competition is minimized
Value-based pricing– Uses buyers’ perceptions of value, not the seller’s cost, as the key to
pricing
Going-rate/Competition-based pricing– Firm bases its price largely on competitors’ prices, with less attention
paid to its own costs or to demand.
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Market-Skimming– Set a high price for a new
product to ―skim‖ revenues
layer-by-layer from the
market
– Company makes fewer, but
more profitable sales
New Product/Service Pricing
When to use– Product’s quality and image
must support its higher price
– Costs of smaller sales
volume cannot be so high
they cancel the advantage
of charging more
– Competitors should not be
able to enter market easily
and undercut the high price
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Promotional Pricing
Low-Interest Financing
Longer Warranties
Free Maintenance
Discounts
Cash Rebates
Special-Event Pricing
Loss Leaders
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Key Points
Compare the pricing needs with the market needs/values
You can have higher prices for items if you bundle them
together (e.g., entrees with sides)
Remember, companies sometimes do what they THINK is
correct when they are going into business or things are
slow — they lower prices to build volume. Once lowered, it
is hard to bring them back to normal
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What Is Your Price Strategy
Based on your work so far (your target consumer;
understanding of the competition; product/service
description), take out another sheet of paper labeled
―Pricing‖ and take 3 minutes to write your initial thoughts
on factors you will consider when establishing prices and
how you can potentially find out more information to help
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ADMINISTRATION/FINANCE
―The company accountant is shy and
retiring. He’s shy a quarter of a million
dollars. That’s why he’s retiring.‖
– Milton Berle
Basics
Open a business banking account– Helps maintain accounting/tax records
Hire a qualified bookkeeper and accountant as soon as
possible
Establish a good record keeping system– Electronic and manual
Importance of good records– Monitor your progress
– Prepare financial records
– Track deductible expenses
– Prepare and support tax reporting
– Historical sales data improves inventory management efficiency
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Requirements Of A Good System
Simple to use
Accurate
Timely
Consistent
Understandable
Reliable and comprehensive
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Records Retention
IF you... THEN the period is...
1. Owe additional tax and situations (2), (3), and
(4), below, do not apply to you
3 Years
2. Do not report income that you should report
and it is more than 25% of the gross income
shown on the return
6 Years
3. File a fraudulent return Not limited
4. Do not file a return Not limited
5. File a claim for credit or refund after you filed
your return
Later of: 3 years or 2
years after tax was paid
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Taxes
Become familiar with basic responsibilities even if you have
a qualified outside professional– http://www.irsvideos.gov/virtualworkshop/ — a very good resource!
• The Virtual Small Business Tax Workshop is composed of nine interactive
lessons designed to help new small business owners learn their tax rights and
responsibilities. – Lesson 1 - What you need to know about Federal Taxes and your new business
– Lesson 2 - How to set up and run your business so paying taxes isn't a hassle
– Lesson 3 - How to file and pay your taxes using a computer
– Lesson 4 - What you need to know when you run your business out of your home
– Lesson 5 - How to set up a retirement plan for yourself and your employees
– Lesson 6 - What you need to know about federal taxes when hiring employees/contractors
– Lesson 7 - How to manage payroll so you withhold the right amount from employees
– Lesson 8 - How to make tax deposits and file your payroll taxes
– Lesson 9 - What you need to know about Federal Unemployment Taxes (FUTA)
– IRS Publication 583 – Starting a Business and Keeping Records
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Financial Statements
Having a solid up-to-date accounting system that
provides good management information by which you
can measure performance is critical to your success!
We will briefly discuss, but strongly urge that you take
additional classes to become comfortable with this
information and how it can help you.
Why?– Information will help establish future goals
– Allows you to measure performance/profitability/cash needs
– Can help you detect problems early
– Can help determine future cash needs/funding requirements
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Two Types Of Accounting
Accrual– Recognize income at the time of sale which is not necessarily
when income is received (think selling on credit)
– Recognize expense at the time expense is incurred which is not
necessarily when it is paid (think buying on credit)
Cash– Recognize income when received and expenses when paid
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Benefits
Accrual accounting allows you to match expenses and
income allowing you to understand the true profit picture
of your business. Balance Sheet and Income
Statement
Cash accounting allows you to accurately monitor the
cash position of your business and your ability to meet
financial obligations. Cash Flow Statement
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Types Of Financial Statements
Types– Balance Sheet — a snapshot of the business’ financial health at a
particular point in time — tells you whether your losing or making money
– Income (Profit and Loss) statement — how your doing over a period of
time
– Cash Flow statement — the life blood of the business — measures your
ability to pay bills
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Balance SheetBalance Sheet Year 1 Year 2
Assets:
Current Assets:
Cash 38,689$ $70,522
Inventory $60,000 $60,000
Receivables 0 0
Total Current Assets: $98,689 $130,522
Prepaid Assets $20,000 $20,000
Accumlated Amortization ($2,857) ($5,714)
Net Prepaid Assets $17,143 $14,286
Fixed Assets
Furniture & Fixtures 40,000 40,000
Computer Equipment 14,000 14,000
Accum Deprec. (12,000) (24,000)
Total Fixed Assets: 42,000 30,000
Total Assets: $157,832 $174,808
Liabilities:
Current Liabilities
Accounts Payable - -
Accrued Payroll - -
Total Current Liabilities: - -
Total Long-term Liabilities:
SBA Loan 96,885 63,519
Other Liabilities - -
Total Liabilities: 96,885 63,519
Equity:
Retained Earnings 28,081$ 78,423$
Stock $32,866 $32,866
Total Equity $60,947 $111,289
Total Liabilities & Equity $157,832 $174,808
A snapshot of finances at
a particular point in time
Shows how
assets/liabilities are
allocated
Generates an Owner’s
Equity figure
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Income Statement
Match income and
expenses for a
specific period
Cash and non-cash
items
Income Statement Year 1 Year 2
Seasonality Factor
Net Sales 806,075 976,000
Cost of Goods Sold 427,220 517,280
Gross Profit 378,855 458,720
Gross Profit % 47.0% 47.0%
Expenses
Employee Wages/Salary 83,026 100,528
Payroll tax 12,897 15,616
Workman's Comp 8,867 10,736
Health Insurance 0 0
Liability Insurance 3,950 4,819
Utilities (Gas, Electric, etc.) 27,500 33,550
Telephone 6,000 7,320
Rent 73,531 73,531
Supplies 9,600 11,712
Advertising 11,950 14,579
Accounting Serv 2,100 2,562
Personnell Benfits 4,000 4,880
Repair/Maint/Copnst 8,000 9,760
Janitorial Service 2,000 2,440
Customer Discounts 10,680 12,932
Travel 2,000 2,440
Debit Card/Bank Charges 4,732 5,460
Freight 40,304 48,800
Miscellaneous 6,000 7,320
Total Operating Expenses 317,137 368,985
EBITDA 61,718 89,735
Depreciation 12,000 12,000
Interest 9,989 8,778
Profit (Loss) before Tax 39,729 68,957
Annual State Taxes 3,259 5,843
Annual Federal Taxes 5,531 9,915
Net Profit (after tax) 30,939$ 53,199$
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Financial Analysis
You can use your information to measure yourself
against similar businesses
– Create ratio to assess things like . . .
• How quickly inventory is moving
• How quickly people are paying you
• Your financial liquidity to pay obligations
– Paying attention to problem areas can help free up cash and
reduce cash needs
RMA (Risk Management Association)
– Data useful in assessing your performance against business of
your type/size
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Cash Flow
Different from profit and loss — measures only cash
inflows and outflows
Lack of cash is the leading causes of business failure
Small business owners must monitor and optimize cash
flow constantly
Steps to improve cash flow– Bill customers ASAP
– Establish strict payment policies (e.g., 2%/10 Net 30)
– Be vigilant in contacting overdue customers
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More On Cash Flow
Cash is generated into a
business through:– Receipt of cash generated as a
result of sales
– Loans or owner investment
– Asset sales
Cash flows out of a business
through:– Payment of business expenses
– Loan payments or owner
withdrawals
– Asset purchases
Next week, we will focus
explore an example of this
important tool!!!!!!!
Cash Flow Statement Year 1 Year 2
Beginning Cash $169,328 $38,689
EBITDA 61,718 89,735
Less Start-up Costs
Store Investment 127,000 0
Lease Deposit 7,000 0
Landlord Improvement 5,000 0
Less Interest Exp 9,989 8,778
Less Capital Exp. 0 0
Less Loan Amort. 34,577 33,366
Less Taxes 8,790 15,758
Ending Cash 38,689$ 70,522$
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Financial Summary
Critical . . . not just important . . . critical to your success!
Remember . . . garbage in/garbage out
Get your books and records set up early and right
Hire a professional whenever possible
Not just for taxes
Keep information up to date, learn what it
means, understand how it can help you.!
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Payment Processing Options
Credit Card Processing/Processing Systems– ―Acquirer‖ (a bank) collects credit card transaction from your
credit card terminal or POS system
– Transactions electronically transferred to two primary
associations of banks (Visa and MasterCard)
– Association collects funds from the credit card holders
issuing bank
• Typical merchant fee of 2-3%
• Typical processing time to transfer funds is 2 days
– Understand all fees, make sure system fits your needs
Rapidly evolving hardware and technologies
(e.g., square reader; near-field communications
using smart phones)– E-Payment Service fees higher 2.5 – 5.5%
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For Next Week . . .
Review and refine:– Mission Statement
– Customer Profile
– Product/Service Definition
– Competition/Competitive Advantage
Become familiar with the following resources– www.sba.gov
– www.business.ca.gov
– http://www.irsvideos.gov/virtualworkshop/
– Add Local SBDC Website here!
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PANEL DISCUSSION