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

3

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

4

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!

6

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.

8

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

9

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

12

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

13

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.

15

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

16

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.,

19

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

20

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

21

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?

22

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

25

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

26

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?

27

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

32

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

34

Requirements Of A Good System

Simple to use

Accurate

Timely

Consistent

Understandable

Reliable and comprehensive

35

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

40

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