Entrepreneurship Final Exam
Technical Feasibility
Functional design of the product/service Attractiveness of the product/service Technical flexibility Durability of the product Reliability Product safety Utility Ease of manufacturing
Venture Capital
Functions Provide capital Provide expertise/network for developing firms 5% funded Criteria Entrepreneurs' personality/experience Product/market Financial factor
Your business idea should be legal and have market, technical, financial feasibility.
In addition, your business idea needs to have clear advantages.
4 Ps of Marketing
4 Ps of Marketing The four major components of a marketing effort—product, price, promotion, and placement. Also called the marketing mix Marketing's goal is to lay out the best way to get sales, and set up the conditions so selling will be as successful as possible. The selling act and the marketing process need each other for the small business to be successful. Product, price, promotion, and placement mentioned above are called the 4 Ps of Marketing or the marketing mix. The next section of the book covers these 4 Ps as well as marketing plans, starting with product.
Partnership
Association of multiple persons as co-owners. Advantage -Easy to form -More capital and skills -Flexibility/Little regulation -No corporate tax Disadvantage -Unlimited liability of at least one partner -Lack of continuity -Less available capital Sharing profits One partner can ruin the firm
Define value proposition. How can a business owner develop a value proposition?
Business owners' unique selling points that will be used to differentiate their products and/or services from those of the competition are referred to as value proposition. Business owners can think of defining their value proposition along the categories of value and cost benefits of quality, style, delivery, service, technology, shopping easy, place, and scale and scope
Off-peak pricing
Charging lower prices at certain times to encourage customers to come during slack periods
Most customers found Jacquelyn's customer service just okay and her hours of operating inconvenient. Should the price go up or down?
Down - value is low
SCAMPER is a way to come up with new ideas
Is there a SUBSTITUTE for this product? Can we COMBINE a chair and a walker to make merrywalker.com? Can we ADAPT the electronic door lock to work on a car? Can a photo printer be MODIFIED to accept pictures without a computer? Can baking soda be PUT TO USE as a freezer freshener? Can we ELIMINATE the need to call a broker to make a stock trade?
Operations
Locations and Facilities - store/manufacturing plant/storage facilities Technology - software/hardware/other IT/industry specific technology Equipment and Tools - such as assembly line equipment and machines
Rearrange or reverse: One of the best examples of this technique is shown in the opening vignette to this chapter.
Magnetic Poetry is a product that by definition is about rearranging things to inspire ideas. Idea Trigger: What can you rearrange or reorder in the way your product or service appears, or the way businesses in your industry usually look or are decorated or located?
The Fundamentals of Pricing: Margin Pricing and Elasticity
Margin - The amount of profit, usually stated as a percentage of the total price. Markup - The amount an entrepreneur adds to costs to provide a profit Margin is the amount of profit, usually stated as a percentage of the total price. Markup is the amount an entrepreneur adds to costs to provide a profit.
Common Mistakes in Selecting Startup Ideas
Lack of objective evaluation No real insight into the market Inadequate understanding of Technical requirements Poor financial understanding Lack of venture uniqueness Ignorance of legal issues 2. Life cycle, timing of product intro 4. Actual cost can be more than double the expectation
Eliminate
search for opportunities that arise when you get rid of something or stop doing something Idea Trigger: What could I get rid of or reduce that would eliminate something my customer has to do?
Market data, customers, customer demand patterns
(e.g., seasonal variations in demand, governmental regulations affecting demand)
Rapid WebsitePrototyping Process
Deploy > Listen > Revise > Repeat Web companies like Google, Napster, Facebook, and others started with an approach built on four stages
What is design thinking? What are some characteristics of design thinking?
Design thinking in business uses designer's sensibility and methods to match people's needs with what is technologically feasible and what a viable business strategy can convert into customer value and market opportunity. design thinking can also be described as solving business problems like designers solve design problems. It contains five components: empathize, define, ideate, prototype and test Some characteristics of design thinking include: 1. Human-centered design" empathy for the person or people you are designing for (attending to emotions) and feedback from users, is fundamental to good design. 2. Experimentation and prototyping" prototyping is not simply a way to validate your idea; it is an integral part of your innovation process. We build to think and learn. 3. A bias towards action: design thinking is a misnomer' it is more about doing than thinking. Bias toward doing and making over thinking and meeting 4. Show don't tell: creating experiences, using illustrative visuals and telling god stories communicate your vision in an impactful and meaningful way. 5. Power of iteration" iterating solutions many times within a project is key to successful outcomes
Penetration Pricing
Setting a low price to get market share
Feasibility Analysis
Technical Market Financial Organizational: team, expertise, experience Competitive
3. Stopping with the first good idea:
The first good idea you come up with is rarely the best. That's because it was the easiest to think of, and so there is little doubt that your competitors have already thought of it, too.
What are the different sources of financing available for startups?
The number one source of financing for most small businesses is from the owners themselves. The other major sources include family and friends, credit cards, banks, and other commercial lenders. There are also a number of other sources that are used less often. These include angel investors, government programs, community-based financiers, stock sales and venture capital
Price lining
The practice of setting (usually) three price points: good quality, better quality, best quality. Price lining is an attempt to appeal to several different markets. In this situation, you might have three models of your product or service price to appeal to the high-, mid-, and low-end market. You might have a computer with all the bells and whistles priced at or near the top of the competitive price range, a bare-bones, stripped down version priced at or near the bottom, and a third model at a midrange price with midrange features. This way you appeal to customers with different budgets and different needs.
Marketing funnel
The rule of thumb in marketing that it takes a large number of people to be made aware of your product in order to find a purchaser. Marketers talk about the marketing funnel, a rule of thumb about how many prospective customers it takes to find one who will actually make a purchase. For mass market and Internet advertising, the typical ratio is 1000 to 1.
Market Feasibility
Understand Full market potential Customers How to exploit the market Opportunities and risks in the market
Key Questions in Market Research
What is the size of the industry What trends are happening in the industry Who are major competitors Who are your potential customers Where can you reach them What do they want and need How do they behave Size of the potential market
1. Identifying the wrong problem :
When a problem doesn't stay solved or an opportunity doesn't pan out as expected, it could be that the wrong problem was defined.
Describe the SCAMPER tool. How does it help entrepreneurs identify new opportunities?
One tool that helps entrepreneurs identify new opportunities is known as SCAMPER, and it is an acronym for a set of cues that trigger new ideas for a business. SCAMPER stands for: substitute, combine, adapt, magnify or modify, put to other uses, eliminate, and rearrange or reverse SCAMPER is a very effective method for helping business owners and their employees come up with alternative solutions and opportunities. The method works because it helps entrepreneurs to step outside the usual way they look at opportunities or try to solve problems. It offers cues that push them outside their traditional areas of expertise, to consider what interesting new forms might be out there that they could try.
MarketLine Advantage What are the strengths and weaknesses of McDonald's? McDonald's Strengths
Operational Portfolio The company's strong operating portfolio enhances its brand image, client base and in turn strengthens its top-line performance. McDonald's is one of the world's largest foodservice retailing chains. Its restaurants offer hamburgers and cheeseburgers, chicken sandwiches, chicken nuggets, wraps, French fries, salads, oatmeal, shakes, desserts, sundaes, soft serve cones, pies, soft drinks, coffee and other beverages as well as breakfast items such as McGriddles, Sausage McMuffin with Egg, Egg McMuffin, biscuit and bagel sandwiches and hotcakes. In FY2018, the company operated 37,855 restaurants in 120 countries, of which 2,770 were company-operated and 35,085 were franchised. Its franchise agreements include conventional franchise arrangements and developmental license or foreign affiliates. Of the total franchises, 21,685 restaurants were franchised to conventional franchisees, 7,225 were licensed to developmental licensees and 6,175 were licensed to foreign affiliates. In FY2018, the company progressed its digital platforms by including kiosks in approximately 17,000 restaurants, digital menu boards in over 21,000 restaurants, and availability of Mobile Order and Pay in over 22,000 restaurants. Cost Efficiency The company reported improvement in cost efficiency during FY2018. Its operating cost as a percentage of sales stood at 58% in FY2018, which was lower than the Foodservice industry average operating costs to sales ratio of 68.14% for the same year. This was due to 8% decline in operating expense from US$13,267.7 million in FY2017, to US$12,202.6 million in FY2018. The decline in operating expenses was due to decrease in company-operated restaurant expenses by 21% and selling, general and administrative expenses by 1% in FY2018. The improvement in cost to sale ratio resulted in improvement in operating margin. The operating margin increased to 42% in FY2018 from 41.9% in FY2017. Comparable Sales and Guest Counts The company reported strong growth in its comparable sales and guest count during FY2018. It reported 4.5% growth in global comparable sales and 0.2% growth in global comparable guest counts in FY2018. It was due to strong performance of comparable sales and guest count across its operating markets. Its comparable sales in the US increased by 2.5% resulting from growth in average check from increased menu prices and product mix shifts. The International Lead segment's comparable sales and guests count increased by 5.8% and 2.4% in FY2018, respectively. This was due to strong performance across all of its operations in the UK and Canada. In addition, the High Growth segment's comparable sales and guest count increased by 4.1% and 1.8% in FY2018, respectively. This was due to positive results across its operations, which was due to strong performance in Italy and the Netherlands. Furthermore, comparable sales and guest count in the Foundational Markets segment increased by 7.1% and 1.5% in FY2018, which was due to strong performance in Japan and other regions. Weaknesses Revenue: The US and High Growth Markets The US and High Growth Markets segments reported decline in revenue during FY2018. The US segment is a major contributor to its revenue stream. In FY2018, it contributed 36.5% towards the company's total revenue and reported year-on-year decline of 4.2% from US$8,006 million in FY2017, to US$7,666 million in FY2018. Fall in revenue was due to the impact of refranchising. The High Growth Markets segment contributed 19% towards the company's total revenue and declined by 27.9% from US$5,533.20 million in FY2017, to US$3,989 million in FY2018. Decline in revenue was due to the impact of refranchising in China and Hong Kong. 2. IBISWorld Women's Clothing Stores in the US--44812 Revenue: Annual growth Profit Wages Segment: Dresses
Describe partitioned pricing, captive pricing and price lining
Partitioned pricing is setting the price for a base item and then charging extra for each additional component. In captive pricing, you sell something, usually a base system, at a relatively low price, but the expendables it uses are relatively expensive. Price lining is an attempt to appeal to several different markets. In this situation, one might have three models of a product or service price to appeal to the high, mid, and low-end market. This way one can appeal to customers with different budgets and different needs.
Flow-through entities
Passes all losses or gains through to owners Sole proprietorship Partnership Limited Liability Company
Melissa was the newest babysitter in the neighborhood. In order to attract a lot of clientele quickly, she set her prices considerably below the competition
Penetration pricing
Assessing Feasibility by Pilot Testing
Pilot Test - a preliminary run of a business, sales effort, program, or Web site with the goal of assessing how well the overall approach works and what problems it might have. With so many sales and service businesses built using the Internet, a low-cost, low-risk approach for testing feasibility exists using the concept of a pilot test .
Albert's photography has won a number of awards for its outstanding quality. Due to this, he now charges 30% more than his competitors
Prestige/premium
Floyd sells good shirts $15, better shirts at $25 and best shirts at $35
Price lining
Marketing Research I
Primary research Interview Observation Focus group Survey
4Ps of Marketing
Product Price Promotion Place
Promotional Mix
how much of each communication approach you will use to sell your product as well as your objective in using each one Advertising Sales promotions Public/Press relations The promotional mix essentially describes how much of each of these five approaches you will use. The key to promotion for you as the entrepreneur is deciding on the promotional mix that works best to meet your needs and your budget.
Skimming
is charging the highest price the market will bear. This technique is usually only possible if you are absolutely the first product or service of your type in the market, and only if it's something people really want. Companies sometimes use this strategy in order to recoup research and development costs or heavy marketing expenses.
Promotion
marketing communication - used to inform or persuade target audiences of the relative merits of a product, service, brand or issue. The aim of promotion is to increase awareness, create interest, generate sales or create brand loyalty.
The Anna Brown museum offers a discounted admission price on weekdays when attendance is low.
off peak pricing
Gail offers a back-to-school sale each year
periodic discount
financing
the act of providing or raising funds (capital) for a purpose. Sometimes an entrepreneur can use credit cards, or funds from friends or family to finance In other cases, these resources are not sufficient. In those situations, debt or equity financing becomes a necessity.
Start-up cost
the one-time expense of opening a business. In a restaurant, for example, start-up expenses would include stoves, refrigeration, food processors, tables, chairs, utensils, and other items that would not be replaced very often.
seed capital (start-up investment)
the one-time expense of opening a business. There is another critical cost to discuss before establishing accounting records for your business. We have talked about the costs of operating a business, but what about the money required to start the business? In a restaurant, for example, start-up expenses would include stoves, refrigeration, food processors, tables, chairs, utensils, and other items that would not be replaced very often.
Value proposition
unique selling points that will be used to differentiate their products and/ or services from those of the competition. ou can talk about your competitive edge—what you do better than your competition—or your distinctive competency—what you do that no one else does, but what it all boils down to is your value proposition
Small business owners divide their costs into two categories:
variable costs - expenses that vary directly with changes in the production or sales volume. fixed costs - expenses that must be paid regardless of whether sales are being generated.
General economic trends:
various economic indicators such as new orders, housing starts, inventories, and consumer spending
Substitute
what might substitute for something else to form an idea Idea Trigger: What opportunities can you think of as a result of substituting or replacing something that already exist?
Before you implement a business idea, you should test the idea for its feasibility
which means the extent to which the idea is viable and realistic and the extent to which you are aware of internal (to your business) and external (industry, market, and regulatory environment) forces that could affect your business.
Venture capitalists typically reap the return on their equity investments in one of two ways:
1. by selling their percentage share of the business to another investor through a private transaction; or 2. by waiting until the company goes public (starts selling stock on the open market) and selling the shares.
In 2000, US Census Bureau estimated 2.67 people/household US Pet Ownership and Demographics Sourcebook estimates 36.1% households own dogs The Sourcebook estimates 1.6 dog/dog owning household Question Number of dog owning households in NJ Number of dogs in NJ Number of dog owning households in NJ that are middle class
1.2 M 1.9 M 0.6M
Public relations
Activities used to establish and promote a favorable opinion by the public. Public relations include publicity and other forms of communication to the public in general in order to promote a favorable opinion by the public about your firm. For example, corporations send out shareholders' reports in order to provide information and create a favorable impression about the firm with the shareholders who may never be one of their customers.
Debt Financing: Pros and Cons
Advantages: -The lender has no say in the management or direction of the business, as long as the loan payments are made and contracts are not violated. -Loan payments are predictable; they do not change with the fortunes of the business. -Loan payments can be set up so that they are matched with the seasonal sales of the business. -Lenders do not share in the business's profits. Disadvantages: -If loan payments are not made, the lender can force the business into bankruptcy. -The lender can take the home and possessions of the owner(s) to settle a debt in case of default—when the borrower fails to meet the repayment agreement. -Debt payments increase a business's fixed costs, thereby lowering profits. -Repayment reduces available cash. -Lenders expect regular financial reporting and compliance with the loan contracts.
Prospects
Sales leads who actually make some effort to learn more about the product, service, or business in anticipation of a possible purchase. Those who have some interest become your sales leads and the most interested ones become your prospects for a sale. So at a fundamental level, promotion drives sales. How many prospects?
5. Describe how you create value for your customers.
Good products or services meet the customer's basic need. Great products or services create additional value for customers, helping them get more out of work or life, or making life easier, or helping them meet other goals (e.g., saving money, living greener, helping others).
Fixed Operating Costs
I SAID U R + "Other FXs" This stands for: Insurance Salaries (indirect labor—managers, office staff, sales force) Advertising Interest Depreciation Utilities (gas, electric, telephone, Internet access) Rent Other Fixed eXpenses
Put to other uses: Think of ways you could generate a high number of opportunities for your product or service beyond what it is traditionally used for.
Idea Trigger: Suppose you learned that all the traditional uses for your product had disappeared and that you have trailer truckloads out back with tons of product. What other uses might there be? Aim for quantity, and allow outrageous ideas to flow along with more mundane ones. Who knows what new applications you may find.
Magnify or modify: Taking an existing product and changing its appearance or adding more features or increasing the hours your store is open or making its advertising more dramatic are some ways you could magnify or modify your idea.
Idea Trigger: What could I make more noticeable or dramatic, or different in some way from my competitors? It need not be in the product itself, but it could be the way you advertise or treat the customer during the transaction that becomes memorable.
Creativity: Avoid Pitfalls
Identifying the wrong problem Judging ideas too quickly Stopping with the first good idea Failing to get necessary support Obeying rules that don't exist
4. Failing to get the "bandits on the train" and ask for support:
Imagine you are on a train in the American West in the late 1800s. At the time, bandits often placed dynamite on the tracks to hold up the train. How can you keep that from happening? One way is to get the bandits on your train. In modern business terms, this means figuring out whose support you must have or who could derail your project and then involving them early in the project.
In General
Most businesses start out as sole proprietorships or partnerships Soon they change to LLC or corporation LLC is ideal for small companies that want limited liability C-corporation is good for attracting large investments (VC, IPO)
Marketing Research II
Secondary research Google Databases MarketLine Advantage IBISWorld Mergent Online Industry associations Chamber of commerce Competitor website
Competitive Advantage
Quality Price Location Selection Service Speed
Put to other uses
Think of ways you could generate a high number of opportunities for your product or service Idea Trigger: Suppose you learned that all the traditional uses for your product had disappeared; what other uses might there be?
1. What is your product or idea?
This is a nontechnical description of the concept simple enough for everyone to understand it.
2. How is your product or idea better?
This is where you explain how your approach is better than other approaches. Reasons can include it is simpler, more capable, more durable, cheaper, or more stylish. In Chapter 9 we talk about the features of products in detail.
6. What is the market and its size?
This looks like the simplest question but is actually the hardest one. "Everyone" does not work as an answer. While precise numbers are likely at this point, you need to have some idea if we are talking about a market of hundreds, thousands, or millions. Where there are competing products, you can get an idea of the market size.
7. Can you develop IP protection for your idea?
This question asks you to think of your strategy for protecting your idea from competitors.
3. How would you define the best initial set of customers? (Who will buy it?)
This question looks at the specific individuals, groups, or organizations you would approach first to buy your product or service.
Succinct Message
Your key point in as few and as memorable words as possible effective Effective messages are succinct messages that will make your business clear to potential clients and customers. You will use more general messages to convey your firm's overall image. Example: Tap the app, get a ride Google Analytics Tells You What Happened, KISSmetrics Tells You Who Did It
SCAMPER
a creativity tool that provides cues to trigger breakthrough thinking S- Substitute C- Combine A- Adapt M- Magnify or Modify P- Put to other uses E- Eliminate R- Rearrange
angel investor
a wealthy individual who invests in businesses.
Adapt
adaptation from existing products or services Idea Trigger: What could you adapt from other industries or fields to your business?
venture capitalist
an investor or investment company whose specialty is financing new, high-potential entrepreneurial companies and second-stage companies. They typically expect to earn 6 to 10 times their money back over a five-year period, or a 45 percent return on investment.
Product
anything that is offered to the market to satisfy consumer wants, needs, and demands goods, services, ideas A product, in general terms, is anything that is offered to the market to satisfy consumer wants, needs, and demands. This can include goods (like Beyond Fleece's clothing, a car, a can of green beans, a CD), services (haircut, divorce), people (political candidates, celebrities), and ideas (a political platform, an environmental message).
Ervin's barber shop offers $15 haircuts and $10 shaves, but you can get them both for $22
bundling
cash reserve
emergency funds and a pool of cash resources. Entrepreneurs must be prepared for the unexpected; the only good surprise is no surprise. The reserve will provide a moderate cushion of protection if you need it. Having a cash reserve will also allow you to take advantage of opportunities.
fixed operating costs
expenses that do not vary with changes in the volume of production or sales. Fixed operating costs do not change based on sales activity levels; A sandwich shop has to pay the same rent each month whether it sells one turkey sandwich or a hundred. However, the owner of the shop can change the cost of the rent by moving or can increase or decrease the advertising budget, for example.
Common Mistakes in Business Plans
"Compared to the competitors, our product is more affordable because we charge a lower price." Instead Compared to the competitors, our product is more affordable because of Labor cost Material cost "Our advantage is that our product is better and cheaper." Our advantage is that our product is better in Speed Features ... OR Our advantage is that our product is cheaper because of Labor cost Material cost ...
Sponsorships Donations
- Paying for a local organization's needs in exchange for recognition. - Monetary or other gifts to organizations or people who are in need. To show your good will, consider sponsorships or donations. For example sponsorships can be a good way to get the word out about your firm. Your budget will not cover renaming a local major league baseball stadium, but it might put your name on the back of a T-ball in a neighborhood where your target market lives and plays team's uniforms Donations are the other paying forward approach, and do not need to be millions of dollars. Products that are nearing expiration, returns, or slightly out of specification may be donated to shelters or other nonprofits.
Search engine optimization Keyword and description tags
- Techniques applied to web pages in order to obtain favorable placement on Internet search page results. - Terms included in the hidden portion of a web page which are used by search engines such as Yahoo! and Google to describe your website and evaluate its focus and category placement. you may want to hire some professional help in order to make your website appear high up on search results, through the techniques of search engine optimization (SEO). Identifying the best keywords and description tags to your web pages can be extremely useful, especially if you are new to the intricacies of the World Wide Web.
There are three ways to finance a business venture, assuming you do not have enough funds in your savings:
1. Obtain gifts and grants 2. borrow money (debt) 3. exchange a share of the business for money (equity)
Substitute: Think of what you might substitute for something else to form a new idea.
A feature that allows your customers to order directly from a website rather than visiting your store or ordering by mail is an example of substitution. Sometimes solutions derived through SCAMPER cues are very "way out" and lead people to some creative ideas for solving annoying problems. Idea Trigger: What opportunities can you think of that come as a result of substituting or replacing something that already exists?
Sales promotion
A form of communication that encourages the customer to act immediately, such as coupons, sales, or contests. Sales promotion is a form of communication that encourages the customer to take immediate action. Good examples of sales promotions include coupons, sales, contests, sweepstakes, giveaways, samples, "buy one get one free," and other gimmicks. They range from inexpensive—sales flyers photocopied—to expensive—all-expenses-paid vacation.
Taxable corporation: C-corporation
A legal entity separate from owners Double taxation of distributions
Markup pricing
A price-setting method where an amount is added to the cost of a product to set the retail price and provide a profit. The method shown in Exhibit 9.2 is an example of what is called markup pricing and is probably the most widely used of the many pricing methods out there. Knowing your costs and the markup —what you would like (or need) to make from each sale—gets to the fundamentals of pricing and relating prices to your business. The computations also tell you what your margin of profit is, and that number is one asked by bankers and is one of the numbers you can often find in industry statistics, so it is a good number to know.
What are the pros and cons of equity financing?
Advantages: 1. If the business does not make a profit, the investor does not get paid 2. there are no required regular payments in the form of principal or interest 3. the equity investor cannot force the business into bankruptcy in order to recoup the investment 4. the equity investor has an interest in seeing the business succeed and may offer helpful advice and provide valuable contacts Disadvantages 1. the entrepreneur could lose control of the business to the equity holders if too much ownership is given up 2. the investors may interfere with the business via unsolicited advice or inquiries 3. a high rate of return is expected 4. the entrepreneur must share profits with equity investors
Equity Financing: Pros and Cons
Advantages: If the business does not make a profit, the investor does not get paid. There are no required regular payments in the form of principal or interest, and dividends for common stockholders are distributed at the discretion of the board of directors. The equity investor cannot force the business into bankruptcy in order to recoup the investment. The equity investor has an interest in seeing the business succeed and may, therefore, offer helpful advice and provide valuable contacts. Disadvantages: Through giving up too much ownership, the entrepreneur could lose control of the business to the equity holders. Even with small amounts of equity, investors may interfere with the business via unsolicited advice and/or continuous inquiries. Equity financing aims to receive a higher rate of return than a lender. The entrepreneur must share profits with other equity investors.
Advertising
Advertising is often used to support the corporate identity and value propositions that are established through public relations efforts. advertising outlets include newspapers, magazines, billboards, television, online ads and so on. Advertising is the major way most businesses convey their message to potential customers. Advertising is the presentation of your company's image, products, and services to potential customers and the general public. It can be done in print outlets, or electronically via mass media or the Internet, or via signs from business cards to billboards to aerial banners. The goal for any advertising is to give customers and the general public a positive impression that they will associate with you, your firm, and its products.
2. Judging ideas too quickly:
At many business meetings when someone suggests a new idea or approach, often the first reaction you hear is, "We've tried that before and it didn't work,"
9. What resources are needed to take the idea and sell it to the customer?
Beyond the start-up dollars that will be needed to buy any raw materials to make the product or develop the service, what information, relationships, and degree of effort will be needed to turn the idea into reality?
10. Can the idea generate sufficient profit?
Can the sales meet your profit expectation? One of the mistakes would-be entrepreneurs make is to assume that everyone will love the idea and that people will be standing in line to buy it once the business opens. Be conservative, factor in the value of your own time, and then estimate future profits.
Distribution
Channels - People and firms who connect producers of goods and services with customers. Manufacturer - The entity which produces a product or service to be sold. Channels are people and firms who connect producers of goods and services with customers. A Manufacturer is the entity which produces a product or service to be sold.
Bundling
Combining two or more products in one unit and pricing it less than if the units were sold separately. This works equally well for services or products. Let's say a haircut is $25 and coloring is $50. For this week, if you do both, you'll pay only $60. The beauty salon has " bundled " haircuts and coloring for a price lower than the two would cost separately. This technique is particularly effective for promoting the sales of a second product or service that might not be doing as well or is newly introduced. A variation of this is selling multiple or bonus packs , such as buying five bottles of hand lotion for the price of three—the kind of packaging that has made Sam's Club so famous. People are creatures of habit, and the more you can get them to use your product, the more likely they are to internalize it—it becomes their brand.
Common Sources of Debt Financing
Commercial loans Real estate (up to 20 yrs) Equipment (up to 7 yrs) Personal loans Credit cards Leases Vehicle lease Equipment lease Asset based (varies) AP (often 30 days) Working capital (up to 1 yr) Bond
Pricing data, range of prices for the same, complementary and substitute products, base prices, discount structures
Competitive data, major competitors and their competitive strength.
Variable costs change with production and sales. They fall into two subcategories:
Cost of goods sold (COGS) or cost of services sold (COSS). Each is associated specifically with a single unit of sale, including: The cost of materials used to make the product (or deliver the service) The cost of labor used to make the product (or deliver the service) 2. Other variable costs, including: Commissions or other compensation based on sales volume Shipping and handling charges
Price-Lowering Techniques
Coupons, Rebates, Loyalty Programs Referral discount - A discount given to a customer who refers a friend to the business These three related methods are used to reduce prices and promote sales. Most coupons are delivered in newspapers (80 percent), 52 but magazines, mail, on packages, handbills, door hangers, Internet, and in person are all other ways of delivery. The higher the value of the coupon, the more likely it is to be redeemed. variation on the loyalty discount is the referral discount , in which a current customer refers a new customer to use the service or buy the product. The older customer then gets a discount for referring the new business. == a. Bundling b. Prestige or premium pricing c. Off-peak pricing d. Product line pricing e. Partitioned pricing g. Periodic discounting h. Referral discount i. Loyalty program j. Penetration pricing
Key Factors for Determining Price
Demand for the product or service Value delivered to the customer Contextual factors Prices set by competing firms Your business strategy Cost There are four key factors for determining an optimum price: 1. Demand for the product or service: Where demand is high, you can charge a premium. Where it is low, you need to consider lowering prices to keep cash flowing into the business. 2. Value delivered to the customer: You can buy hair-coloring kits at the supermarket for $8.00, and a single use of professional products would not cost more, but having a professional do the job with professional products and expertise can easily cost 10 times as much—and many people gladly pay it. 3. Prices set by competing firms: If a liter of Coke costs a dollar, few are likely to pay $2 for a liter of Pepsi. 4. Your business strategy and product placement: A company that prides itself on an environmentally conscious approach to manufacturing probably would not choose to use cheaper, unrecycled components, even if it helped profits.
The Fundamentals of Pricing: Value
Demand is really important for pricing The value delivered to the customer is also important to the pricing decision The value delivered to the customer is second in order of importance to the pricing decision In addition to demand and value provided, you must consider the prices set by your competition == In addition to demand and value provided, you must consider the prices set by your competition
Key Metrics
Direct costs? Number of prospects? Traffic in your website? Conversion rate? Cash balance?
Place
Distribution - The process of getting your product to your customers location
Neil is worried; Toys R Us has announced that they will be building a store less than a mile from his toy shop. Should the price go up or down?
Down - competition
Portia had projected selling 1000 bottles of her organic bubble bath in the first quarter. She had only sold 800 bottles through by the end of the quarter. Should the price go up or down?
Down - influenced by marketing objectives
Pam was interested in selling as many World Series Championship T-Shirts as she could before the next baseball game. Should the price go up or down?
Down - strategy
Equity Financing
Equity means that, in return for money, an investor will receive a percentage of ownership in a company. For the $120,000 investment, an equity investor might want 10 percent ownership of the company, which would mean 10 percent of the business's profits. The investor is hoping that 10 percent of the profits will provide a high rate of return, over time, on the initial investment of $120,000.
Marketing plan
Even if you plan to use only your own personal savings and direct marketing, you're going to need some way to determine whether you are accomplishing your goals, something to make sure you're on the right path. At the absolute minimum, a marketing plan will help you articulate what it is that you are going to do.
Make Sure an Idea Is Feasible
Feasibility - the extent to which an idea is viable and realistic and the extent to which you are aware of internal and external forces that could affect your business
What Is the Best Type of Financing for You
Financing is not a one-size-fits-all proposition. Lenders and investors alike insist that entrepreneurs have their personal resources involved before they put in additional funding. risk tolerance - the amount of risk or threat of loss that an individual is willing to sustain. Each venture has unique requirements and circumstances, along with the structure and challenges of the selected industry.
Location
First choice for many entrepreneurs is their hometown Local banker knows you, more likely to loan money You understand market's needs and wants Friends and family are usually first customers When choosing a location to set up your company most entrepreneurs choose their hometown. It is close, comfortable, and they are known in the area. However, make sure local laws are checked first.
Elasticity
From economics, the idea that the market's demand for a product or service is sensitive to changes in its price. If the idea of dropping the price to increase sales makes sense to you, congratulations! You understand what the economists call price elasticity.
High or low customer contact
Hospital Manufacturing business Legal office Restaurants Software company Physical retail store Dry cleaner
Components of The Marketing Plan
Identifying your target market Marketing Strategy and Objectives Product, promotion, price, place The components of a marketing plan are fairly straightforward. First, you discuss your target market—the people who will be buying your product. In the next section, detail your marketing strategy and objectives. Value proposition and marketing message How your message is different from competitors == Finally, you explicitly address the 4 Ps: product, promotion, price, and place
8. Who are the people behind the idea?
If a great idea with high market potential also has a person or team behind it that is a good fit, the idea is much more likely to be successful than it would be without that person or team. While your skills and talents might have led you to discover the idea, do you have all the skills necessary to turn this idea into a business?
Price Elasticity
Inelastic product - product for which there are few substitutes and for which a change in price makes very little difference in quantity purchased Elastic product - product for which there are any number of substitutes and for which a change in price makes a difference in quantity purchased Something that is essential to how you live and does not have many substitutes or alternatives is called an inelastic product. Housing, basic food, basic clothing, basic transportation, and utilities are examples. The T-shirts you are planning to sell go beyond basic clothing and fall into the category of an elastic product, which has a lot of substitutes—cheaper T-shirts, used T-shirts, other types of shirts, digging deeper in your closet, and so on.
Gifts and Grants
Informal gifts include such items as cash, free use of facilities and equipment, unpaid labor by friends and family, and forgiveness or deferral of debts. Business grant - Typically used for research and its commercialization -Difficult for low tech companies
Delmar was happy; he just bought his 9th carwash and now got one free
Loyalty
Put them on a Continuum
Luxury handbag Gasoline Bread Car
Rearrange (or reverse)
Magnetic Poetry example Idea Trigger: What can you rearrange or reorder in the way your product or service appears?
Low customer contact business
Manufacturing business Commercial space might be appropriate Support businesses will be in or near the area Business incubator: www.nbia.org Generally low customer contact businesses are manufacturing businesses, the headquarters of client location-based services, or remote location services. Customer access is relatively unimportant. More critical are access for your employees, reasonable cost, and the space necessary to do your business. Certain manufacturing operations will need adequate utilities and specialized transportation too.
Debt Financing
Many businesses have some combination of debt and equity financing. One challenge you may face is determining what type of debt financing to pursue , based on your business type and life-cycle stage, your personal finances, wealth, preferences, and the options available to you. Different types of lenders will have various rates and fees, so it is worthwhile to compare the total package costs.
Adapt: Think about what could be adapted from products or services that already exist.
Many successful businesses are founded on the concept of adaptation. It's a popular innovation strategy that can be just as effective, and much more likely in the real world, than business opportunities that are the result of radical innovations such as inventions. Radical innovations: rejecting existing ideas, and presenting a way to do things differently Idea Trigger: What could you adapt from other industries or fields to your business?
The Fundamentals of Pricing—Contextual Factors
Marketing Strategy Channels of Distribution Competition 1. More commonly, firms set prices to maximize profits or to increase market share. Increasing market share usually means pricing toward the low end of the competition in order to take market share from the competition 2. Your price must be consistent with the rest of your marketing strategy. If you are advertising high quality or prestige but price your product lower than the competition, your customers will be confused at best, or at worst simply not believe your ads. 3. Everyone who handles your product will be expecting to make something from it. If you are using a traditional retailer, your product may go through several middlemen (see Chapter 11 for more information) before getting on the shelf. 4. Just as yours is, your competitor's products are a "bundle of satisfactions." How does their product bundle match up to yours?
Crafting Your Message
Message should combine the elements of your product or service's value proposition with the needs of your target customer Need to decide the voice or tone of you message i.e. humor, fear, patriotism, collegiality, etc. The message you craft should combine the elements of your product or service's value proposition with the needs of your target customer. If they want speed, you should stress speed in your message. Once you have that key element, what can you do in the message to reinforce, repeat, or otherwise support it? Red is the color of speed, for example, and a fast-paced radio, television, or web ad can also support the impression of speed.
Key Assumptions in Finance
Must be detailed How you came up with the values in the finance section? How did you make the forecast on sales? What is the growth rate you assume? Any key expenses and hires?
Combine: Think of possible combinations you can make that result in something entirely different.
Not long ago, if you wanted to buy a book, you went to a store that typically carried only books, and if you wanted to buy a cup of coffee you went to a coffee shop, and if you wanted to hear music you went to a club or theater. Today, you can have all three under one roof at many establishments, including big ones such as Barnes & Noble, but also some smaller businesses such as Tattered Cover Book Stores in Denver, Colorado. Idea Trigger: What separate products, services, or whole businesses can you put together to create another distinct business?
Sole Proprietorship
Owned and operated by one person Advantage -Easy to form - Own profits -Flexibility/relative freedom -No corporate tax Disadvantage -Unlimited liability -Lack of continuity -Less available capital -Limited viewpoint and experience
C-Corporation
Owners have stock Advantage -Limited liability -Easy transfer of ownership -Unlimited life -Easy to secure capital Disadvantage -Restrictions (charter and laws) -Organizing expenses -Double taxation More expertise Regulations Board of directors and officers are required by law
Assured Lawn Care Service charges $25 to mow the lawn, $5 more if you want the grass bagged, $10 to do edging, $30 to fertilize, $15 to aerate and $25 for weed killing
Partitian pricing
Goods-Services Mix
Pure Good > A Good-Dominated Product > Hybrid > A Service-Dominated Product > Pure Service Most people think in terms of product or service. But few offering fall into those black and white categories. Examples: •Pure good: Shampoo •Good dominated: A car (comes with warranties and service) •Hybrid: A restaurant- Which is more important, the food or the atmosphere and service? •Service Dominated: Your taxes. You get the service of having them done, but also the papers to send in and a copy to keep. •Pure service: Having your car washed.
Tian told her best friend, Ahn to use Associated Brokers and the next time Tian made a trade the company waived their fee because Ahn had set up an account with them
Referral
Fixed Operating Costs Can Change over Time
Salary Advertising Heating costs If you pay your restaurant manager $3,600 per month in salary, you will have to pay that amount whether the restaurant sells one meal or a thousand. The cost is fixed. The word fixed does not mean the cost never changes, just that it does not change in response to units of production or sales over a relevant range of production. For instance: Advertising. The cost of advertising will change based on decisions the entrepreneur makes about how much to spend to reach the consumer, not because of current sales (although low sales may provoke an increase in advertising). Heating and cooling costs. The price of heating and cooling goes up or down based on the weather and utility prices, not on the amount of revenue the business earns.
Periodic or random discounting
Sales conducted at either predictable or non-predictable intervals. Attracting more business. Smoothing service cycles Building loyalty Moving excess inventories Alleviating temporary cash flow problems Periodic discounting refers to sales that happen regularly, such as the January White Sale or the special on Christmas cards on December 26. You may need to do one of these to keep up with your competition, since savvy customers often expect these sales. An alternative is random discounting where you run a sale unexpectedly What do happy hours and using your cell phone late at night have in common? Both can be examples of off-peak pricing . Services have busy periods and slow periods. Restaurants give wait staff split shifts with time off between lunch and dinner, but not every service can do this. By putting on a sale during slack periods, you may cover part of the cost of staying open.
Direct marketing
Selling your goods or services to consumers without intermediaries, typically to select customer groups and typically with tracking of the results. Direct sales Direct mail Telemarketing Guerilla Marketing (door-knob hangers, flyers, T-shirts, Balloons) Direct marketing is selling your goods or services to consumers without intermediaries, typically to select customer groups and typically with tracking of the results.
Prestige or premium pricing
Setting a price above that of the competition so as to indicate a higher quality or that a product is a status symbol. Generally prestige pricing is for an item considered a status symbol, such as a Rolex watch or a Mercedes automobile. Premium pricing is used for nonstatus symbol types of products, such as toothpaste, shampoo, or laundry detergent. The idea behind both is the same.
Partitioned pricing
Setting the price for a base item and then charging extra for each additional component. Partitioned pricing is alluded to in the computer example in the text —setting a base price and charging extra for all other components. You set the price for the main component—a computer for $999—but just about everything else you need is extra
Captive pricing
Setting the price for an item relatively low and then charging much higher prices for the expendables it uses. For certain products and services, captive pricing works well. In captive pricing, you sell something, usually a base system, at a relatively low price, but the expendables it uses are relatively expensive.
Design Thinking
Solve business problems like designers solve design problems Empathize Define Ideate Prototype Test
Developing a Value Proposition
The goal of this value proposition is to create and occupy a space inside the target customer's head. Create a value proposition for your chosen small retail business by replacing the text in parentheses below as it reflects the product, market, and strategy. ● For (target customer) ● Who (statement of the need or opportunity) ● The (retail business name) is a (product or service category) ● That (statement of key benefit-that is, compelling reason to buy/purchase) ● Unlike (primary competitive alternative) ● Our business (statement of primary differentiation) ● Is available (where) Now place the answers in paragraph format to arrive at the overall value proposition. Feel free to share your perception of the proposition with the actual small business owner. Example: For urban/suburban people who need transportation immediately Uber is a peer-to-peer ridesharing company that offers rides on demand. Unlike traditional taxi, our business provides a mobile app that finds a car quickly and the driver knows exactly where to go. The app is available in both Android and iOS systems.
4. (Why will they buy it?)
The question in parentheses might better be phrased, "Why would they buy yours ?" Ideally if there are competing products or services, you want to explain why the customer would buy your product or service instead of the competition's. If you cannot come up with a strong case on behalf of your own idea, it probably is not going to work. The only way to know for sure is to ask potential customers about their interest.
High customer contact business
Three critical site selection considerations: Traffic, Customer ease, Competition Presence of traffic generators in the area Parking is also an issue Businesses with high customer contact include such diverse operations as medical or legal offices, restaurants, retail establishments, dry cleaners, and other businesses that are highly dependent on being convenient to the customer. For these operations, there are three critical site selection considerations: traffic, customer ease, and competition
The Total Product Approach
Total product - The entire bundle of goods, services, and meanings of your offering; includes extras like service, warranty, packaging and delivery, as well as what the good means to the customer. The total product includes the entire bundle of product and services that you offer, but is based not only on what you as the small business owner thinks about the product, but also about how customers think about it. An Alabama bottle-making company discovered that one of the top 10 reasons customers liked their 16- and 20-ounce screw-top plastic bottles was because, when filled with water and a enough rocks to sink the bottle, it makes a safer toilet tank space filler than bricks, which can break down when left in water for years. == Why is the total product important to understand? What you are/mean to the customer is much more than your core product. Knowing what products mean to your customer, your target market, helps you design the products they'll want and design the rest of the marketing plan - price, distribution and promotion.
Briefly describe any two ways by which business owners convey their promotional message
Traditional means of conveying a message includes advertising, sales promotion, public/press relations, and direct marketing advertising" advertising is often used to support the corporate identity and value propositions that are established through public relations efforts. Part of conveying your propositions that are established through public relations efforts. Part of conveying your message to your customers, advertising outlets include newspapers, magazines, billboards, television, and internet banner ads. Sales promotions: it is a form of communication that encourages the customer to act immediately. Good examples of sales promotions include coupons, sales, contests, sweepstakes, giveaways, samples, "buy one get one free", and other gimmicks.
Verna's marketing research showed the local coffee shops sold their coffee 25% above her price. Should the price go up or down?
Up - competition
Terry had trouble keeping up with orders for his new law care service. Should the price go up or down?
Up - demand
Margaret intended that her one of a kind quilts be considered collector's items. Should the price go up or down?
Up - strategy
Mary Louise's customers like the prestige of owning clothing once owned by movie stars and other famous people. Should the price go up or down?
Up - value
Portia had projected selling 1000 bottles of her organic bubble bath in the first quarter. She had only sold 800 bottles though by the end of the quarter. Most customers found Jacquelyn's customer service just okay and her hours of operating inconvenient. Verna's marketing research showed the local coffee shops sold their coffee 25% above her price. Margaret intended that her one of a kind quilts be considered collector's items. Mary Louise's customers like the prestige of owning clothing once owned by movie stars and other famous people. Neil is worried; Toys "R" Us has announced that they will be building a store less than a mile from his toy shop. Pam was interested in selling as many World Series Champion T-Shirts as she could before the next baseball season. Terry had trouble keeping up with orders for his new lawn care service.
Up or Down?
Example of Segmenting
Walmart: Suburban/Rural Middle to Low income Price sensitive == HomeDepot Middle class Families who Like DIY == The Body Shop is a good example of the success that can result from choosing the right market segment. Founder Anita Roddick disliked paying for expensive packaging and perfuming when she bought cosmetics. She was also annoyed by the extravagant claims made by many cosmetics companies and by the high prices of their perfumes and lotions. Roddick saw an opportunity to create a different line of cosmetics. She would use natural products that would be packaged inexpensively and marketed without extravagant claims. == Young, Female Price-sensitive and prefers natural products
5. Obeying rules that don't exist:
We sometimes put obstacles in front of ourselves because we think we can't do something, when in fact there is no reason we can't.
Screening Ideas
What is your product or idea? What are competing products and how is your product or idea better? How would you define the best initial set of customers? (Who will buy it?) Why will they buy it? Describe how you create value for your customers. What is the market and its size? Can you develop IP protection for your idea? Who are the people behind the idea? What resources are needed to take the idea and sell it to the customer? 10. Can the idea generate sufficient profit?
Impression
What it is called when someone notices a promotional effort. To get people to buy what you are offering, you first need to make an impression on them, letting them know who you are and what you are offering. Those who have some interest become your sales leads
Eliminate: Search for opportunities that arise when you get rid of something or stop doing something.
What products or services emerged when these questions were asked: What if people didn't have to leave their houses to go grocery shopping? What if you could buy something (or do bank transactions) without leaving your car? Idea Trigger: What could I get rid of or reduce that would eliminate something my customer has to do, and as a result give the customer more than he or she expected?
LLC
pass-through taxation with limited liability Owned by "Members" Advantage -No tax on the company -Limited liability -Corporations and partnerships can be LLC members -No limit on the number of members Disadvantage -Regulation differs across states -Relatively expensive to form
Combine
possible combinations that result in something completely different Books, coffee, and music: Barnes & Noble, Tattered Cover Book Stores Idea Trigger: What separate products, services, or whole business can you put together to create another distinct business?
Odd-even pricing
simply means setting a price that ends with a 9, 7, or 5. For example, don't charge $100; charge $99.99 (or $99.97 or $99.95). Numbers that are multiples of 10 are a psychological hurdle for consumers.
payback period
stimated time required to earn sufficient net cash flow to cover the start-up investment. When compiling and analyzing start-up costs, one consideration will be how long it will take for you to earn back your start-up investment. Start-Up Investment / Net Cash Flow per month
Magnify (or Modify)
taking an existing product and changing its appearance or adding more features can also cue you to minimize something Idea Trigger: What could I make more noticeable or dramatic, or different in some way from my competitors?
Applying Market Segmentation Methods
• Geographic. Dividing a population by location. • Demographic. Dividing a population based on a variable such as age, gender, income, or education. • Psychographic. Dividing a population by psychological differences, such as values (conservative, liberal, open- minded, traditional), lifestyle (sedentary, active), personality traits (worrier, Type A, shy, extroverted), and social group (white collar, blue collar). • Behavioral. Dividing the market by purchase behaviors that have been observed, such as brand loyalty or responsiveness to price.
