Reference: Business on Main

Do you make more money selling cookies or cupcakes? Who’s more important to your business: the big customer who ties up half your workforce, or the dozen smaller customers who occupy the other half?

Knowing which of your products or services generates the biggest profit margins is critical to building a sustainable business. It helps you determine where you should focus your resources for future growth, and where you should be trying hardest to cut costs or raise prices. Yet surprising numbers of small-business owners overlook this fundamental exercise.

“Too many business owners think in terms of sales and revenues, and not the bottom line,” says Joellen Sommer, a certified public accountant whose New York City-based consulting firm, Your Own CFO, provides clients with on-call, part-time or interim chief financial officers. “They really don’t know what the cost is to produce a certain product, or at least not the all-in cost. If they provide a service, very few track the true cost of their employees who deliver it.”

Sommer recalls working with a firm in the advertising industry that was shocked to discover that its largest client was actually costing the company money. When it came time to rebid the business, her customer let the client go rather than try to hold its prices, then redirected its energy to finding new clients.

Engineer and entrepreneur Robert Sherwood had a similar epiphany several years ago. After a long and successful career in Silicon Valley in which he grew one of his startups to $100 million in revenues in just three years, Sherwood returned to his home state of Kansas and launched SmartText Corp., a small company that sells legal forms and business documents via the internet.

For years, Sherwood assumed that his highest-priced products generated his biggest profit margins. After all, once he’d developed a large and complex document, it cost nothing more to deliver over the internet than one of his simpler forms. What he failed to consider were post-sale costs. It turned out that customers spending $150 on a document were a lot more demanding than customers shelling out $10. When they had trouble figuring out how to download a purchase or save it to a hard drive, they were much more likely to call his company for help.

Sherwood tried beefing up the “frequently asked questions” page on his website and offering alternative delivery methods, such as file transfer protocol, to ease the burden, but to no avail. Finally, he began to position his lower-cost but higher-margin products more prominently on his website. That led to lower revenues as his average selling price fell, but higher profits as customer service calls went down. On sales of about $1 million annually, profits rose by nearly $150,000.

Crunching the numbers
The simplest way to measure the profitability of a product or service is by its gross margin: the sales price less the direct material and labor costs to produce it, divided by the sales price. If, for example, your $25 widgets cost $20 to produce, your profit margin is 20 percent.

For many companies, however, that is only a starting point. The gross margin calculation does not include overhead expenses like rent or equipment costs, or even selling expenses. The more of those costs you factor in–especially where they vary significantly from product to product or service to service–the more accurate a picture you’ll get of your true profit margin.

Using the data
Once you’ve calculated profit margins for your various products or services, you’ll need to decide what to do with the information. In simple terms, you might do one of three things with low-margin elements of your business: cut production costs, raise prices, or, if neither is possible, discontinue offering the product or service. The real world is more complex. Fast-food chains might enjoy their biggest profit margins on french fries and soft drinks, for example, but they’re not about to stop selling cheeseburgers. Most businesses need to offer a well-rounded menu of products and services to attract and retain customers. But there is still much you can do.

Consider the experience of FHI Heat Inc., a Solon, Ohio-based producer of flatirons, blow-dryers and other hair-care products. After joining the company in 2008, CFO Michael Paull began a rigorous analysis of its profit margins by product, product line, distribution channel and customer. Using the results of that analysis, the company has seized opportunities to pair low- and high-margin products together in offers that create higher-blended profit margins while also boosting sales (think of fast-food value meals). It has also negotiated price breaks from vendors where possible, and in some cases raised its selling prices–even at the cost of losing a few low-margin customers. Over the past two years, Paull says, the effort has helped the company double its profit margins.

Are you ready to take a closer look at which goods and services generate your best profits? Here are four tips:

1. Verify the integrity of your data. Unless you have a good handle on your true cost inputs, you can’t hope to calculate profit margins accurately.
2. Share your findings with other decision makers in your organization who can impact what it costs to produce your goods or services and what you charge.
3. Consider the indirect consequences of any changes you make. Just because one product has lower profit margins than another doesn’t necessarily mean it should be dumped. Different products and price points appeal to different customers. And in sufficient volume, low-margin products can generate more profits than high-margin products that are moving slowly.
4. Make margin analysis an ongoing discipline. Your product offerings, costs and pricing power are constantly shifting. Depending upon the nature of your business, consider monitoring margins on a quarterly or monthly basis.

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We are: SCORE Cincinnati - For the life of your business

The business plan is the “blueprint” for the implementation process. It focuses on the four major sub-plans: marketing; strategy; operational/logistic; and financial. While the business plan often goes through some revision, it generally represents a rather advanced stage in the planning process. The primary product or service to be offered, based on the results of the market research, should be determined. Whether the business will be a start-up, purchase of an existing business or a franchise should certainly be firm at this point. Often, a specific business location is indicated, or at least a rather specific area.

Time estimates in a business plan should allow for meeting all the necessary regulatory requirements and acquisition of permits to get to a “customer-ready” condition. The amount of funding required and a general approach to raising these funds should be determined. Marketing mix issues focus on how the product or service is differentiated from the competition.

A business can differentiate itself on any of what are often referred to as the “four P’s” of marketing: product characteristics, price structure, place or method of distribution, and/or promotional strategy.

Strategic issues relate broadly to the company’s mission and goals. Every venture must continually assess its strengths and weaknesses, the opportunities to be seized, and any threats to the success and plans of the business. Operational issues relate to company structure, and the scope of the business. The operational plan addresses tangible items such as location, equipment, and methods of distribution. Decisions on these issues largely determine startup costs.

The financial proposal includes an estimate of the amount of money needed to start the venture, to absorb losses during the start-up period, and to provide sufficient working capital to avoid cash shortages. It projects sales and profitability over some period into the future, generally 3 to 5 years. Where outside funding is sought, it also describes distribution of ownership of the venture and methods of debt repayment and/or buyback of partial ownership.

Where implementation of the plan requires participation of lenders and/or investors, the plan must clearly and convincingly communicate the financial proposal to the prospective stakeholders: how much you need from them, what kind of return they can expect, and how they can be paid back. Many entrepreneurs insist that their business concept is so clear in their heads that the written plan can be produced after start-up; this attitude “short-circuits” one of the major benefits of producing the plan. The discipline of writing a plan forces us to think through the steps we must take to get the business started, and, to “flesh out ideas, to look for weak spots and vulnerabilities,” according to business consultant Eric Siegel.

A well-conceived business plan can serve as a management tool to settle major policy issues, identify “keys to success,” establish goals and check-points, and consider long-term prospects. The plan must realistically assess the skills required for success of the venture, initially and over the long run, and match the skills and interests of the team to these requirements. Test the plan, and an accompanying oral presentation, on friends whose business judgment you value. Let them assume the role of a prospective investor or lender.

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We are: SCORE Cincinnati - For the life of your business

Do your sales people have a passion for sales?

If your sales people do not… Rule #1 : Suggest that they seek employment elsewhere. Rule #2: Replace them them with people that love sales. If a sales person does not love selling, they will rarely bring you sales success. You do not want “order takers.” Unsuccessful sales people will give you reasons why customers will not buy from your company. Rarely will they say that they really do not know their product or are not really putting in the necessary time or effort. If they are not doing the job, shame on them and shame on you. You cannot afford to keep them on the “if come.”

Take a long hard look

Do you know what to look for in a sales person? Most sales applicants can present a lot of reasons why they will be great for you . Suggest you might be hiring on straight commission and see what they say… If they are from your industry, they will tell you about all the business that they can bring with them. Usually you can discount that by 50-100%.

Some companies prefer little or no experience, so they can train the new sales people properly and do not have to overcome bad sales habits.. . Because an applicant has been with 5 other companies does not mean good experience, it usually means failure.

The best sales people

Having trained & worked with 1,000s of sales people, I have noted 4 traits that the most successful have in common:

1. They love selling. (are passionate about)
2. They have worked very hard to know everything about what they are selling (this is crucial).
3. They are enthusiastic and optimistic.
4. They put in a lot more time and effort than the “average” sales person (who sells far less).

Note: None of the above mentioned were “born sales people.”

For help with your sales organization, contact SCORE.org or your local chapter of SCORE.

Bill Haman, SCORE Cincinnati

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Based on an opportunity scan, does the market need a product or service that is not currently being provided? Is there a needed product or service currently being provided in a less than satisfactory way? Is some particular market being underserved due to capacity shortages or location gaps? Can we serve any of these needs with some competitive advantage?

Remember that a business idea is not a business opportunity until it is evaluated objectively and judged to be feasible. You may wish to choose two to five of the ideas that seem most promising for more detailed study. Trying to consider too many would spread your time, energy and focus too thin. At the same time, if you focus too early on only one business idea, you are more likely to become “attached” to it, and could lose your objectivity.

Testing the feasibility of your top business ideas involves time and effort to collect key information. A first pass might consist of consulting recent journal articles that evaluate the market of interest; most libraries have computer-based indexes of periodical articles, such as InfoTrac. Other useful library resources include industry trade books, directories, and other sources of industry statistics.

Craft an entry strategy. What type of business could best seize the chosen opportunity? Would taking in partners with complementary skills enhance my chances for success? What would be the optimum location? Whom would we serve, and how? Would my chances be improved by buying a franchise or an existing business, as opposed to starting a venture “from scratch?”

A small business is the usual product of entrepreneurship. Can a person start a large business? Only 4% of businesses employ over 20 people at start-up. What kinds of businesses are the larger start-ups likely to be? My sense is that most would be food service businesses, and many of those would be franchises.

Over half of business start-ups consist of 1 or 2 employees. What kinds of businesses can you enter with only 1 or 2 employees? Most would probably be considered professional practices (medical, law, accounting) rather than commercial businesses.

Small businesses are characterized by independent management, closely-held ownership, a primarily local area of operations, and a scale that is small in comparison with competitors. Many are small by design, or are “lifestyle” businesses, where the primary objective is employment for the principals.

Many are intended to be more “entrepreneurial ventures,” with the intention of generating substantial growth in scale of operations and profitability. Successful entrepreneurs craft such an idea into a business concept that, hopefully, fills a void in the marketplace. You should enjoy your concept and be excited enough to relay your feelings to your market.

Your concept does not need to be a major breakthrough. It could simply be an improvement to an existing product or service. The improvement could be as simple as better service and/or quality than is currently available, a faster or otherwise better method of delivery, or a technological improvement.

Solicit input from friends and other consumers of the product as currently offered. Ask questions like: Is there a need? Would YOU buy it? What price would you expect to pay for it? Is there a better way to provide it?

Check out how the competition is providing the product to the market. Determine what makes your concept different from the competition. Why would the market be better off doing business with you? What can you give the market to improve their experience with the product? Does your product or service exceed the expectations of the market?

Define the needs of your market by listening to prospective customers and understanding how your product might fill that need. Is there something more you could do, to make it more attractive to your market? Is your product a solution to a problem in your market? How will you handle customer service complaints? What are your guarantees to your customers?

Statistics show that 80% of company sales come from repeat orders and referrals from satisfied customers. Exceed your customers’ expectations and they will be back, and they will refer you to others.

Refining and improving your concept is an ongoing process. Maintain a high profile in your community to develop relationships that help promote the product and serve as a referral and constructive feedback network. This involvement will only produce these benefits, however, if you are sincere in your willingness to work hard for the community you live in. If you don’t the available time to offer your community, perhaps you could give your product as a gift to local charities or sponsor a local event where your community would benefit.

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Why do people start small businesses? The most frequently cited motivation for business start-ups is to allow the entrepreneur to achieve independence; money is secondary. Is this surprising? The other reasons named most often are that an opportunity presented itself, a person took over the family business, or the person simply wanted to be an entrepreneur. Identify your motivation.

For context, what reasons might people offer for joining a large corporation? For choosing a government career? A union job? Certainly, many people desire security, fringe benefits, and a predictable career “trajectory.”

What kinds of people start businesses? Their skills are seldom different from those of people who succeed at working for others. The more successful entrepreneurs tend to be proactive, assertive, and highly observant. They are efficient, quality-conscious, and good at planning and procedures. As business operators, they are committed to “partnership” with employees, customers, suppliers, and their community. Would these skills or personality traits lead to success at any professional pursuit?

Most entrepreneurs value control, freedom, flexibility; and self-reliance. They generally desire responsibility and personal fulfillment. Most entrepreneurs are not “gamblers;” they have a preference for moderate risk (What is the largest financial risk that you would consider moderate?). They are always searching for opportunities, and willing to pursue some.

These are merely general characteristics. How might we apply them to our own fitness for, and commitment to, the entrepreneurial lifestyle? We need to ask ourselves some tough questions:

Do I really want to start or own a business? What are my real reasons for considering going into business? The motivation must be strong enough to sustain you when the excitement of the startup has passed, and the everyday grind begins.

Is there a product or service that fits my talents or desires? How should I address the opportunity? About 65% of new businesses are startups, 30% purchases of existing businesses, with the remainder inherited, promoted or otherwise brought into ownership. About 11% of the businesses operate under a franchise name.

Am I ready yet? Why do you think so many new business founders are in their 30s? Perhaps it is because they have enough experience to be confident, yet are still flexible enough to take some risk. Do you think entrepreneurs are born (demanding parents, ethnic tradition) or made? Is it for you? If so, identify what additional skills or knowledge would increase your readiness.

For women and minorities, there are additional considerations relevant to their chances of success. Do they have to be “better” to make it, or is entrepreneurship the only true meritocracy? Is any disadvantage only at startup?

Do I have an adequate support structure? If you have a spouse, or are relying on some other form of family support, make sure that they understand the sacrifices involved and the pressures these will put on relationships.

Can I place developing this business over other interests and goals for the foreseeable future? Am I willing to take on the personal demands of entrepreneurship? For example, can I work a full day as an employee of another firm, then work at my coffee shop evenings and weekends until it can support me full-time? There is more to life than work, and maintaining a balanced and healthy lifestyle can be a challenge for the self-employed.

Can I muster the resources to make the venture a success? Do I respond well to continuous pressure? Once I make the venture a full-time pursuit, can I live without a regular paycheck, a predictable work schedule, and for a while without vacations and other benefits? Even after startup, business concerns seldom end when you lock the door at closing time. Am I prepared for the possibility that I might lose my money and property, and damage my health and self-respect?

There are no right or wrong answers to these questions, only those that best reflect your feelings on these issues. Similarly, if your feelings indicate that you should not take the entrepreneurial path, it is certainly not a sign of weakness or any other sort of deficiency. It is more likely a decision that reflects the best life-work balance for you.

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We are: SCORE Cincinnati - For the life of your business

Recently one of my Facebook friends shared a video with me and his other friends about the disposal of personal computers and their effect on the environment. I was, to say the least, shocked and then pangs of guilt moved in. Over the years I have thrown out computers, monitors, network adapters, printers and simply tossed them in the trash not knowing that there would be a possibility of some of that hardware poisoning people in faraway lands. Videos for you to watch are shown below.

Here in Cincinnati, I learned recently that Brien Hope, a long-time SCORE counselor, works with the Cincinnati Computer Cooperative, a 501(c)(3) non-profit organization, which recycles computers donated by individuals, schools, non-profits and for-profit companies. C3 refurbishes all the computers they can for donation to schools, and low cost availability to non-profits, students, senior citizens and low income persons receiving sate or federal assistance. In a recent email from Brien he said “This is to let you know that C3 runs an environmentally sound program which diverts computer equipment from landfills. C3 was named the computer recycling by the Cincinnati Magazine for 2009, is fully endorsed by the BBB. Component Breakdown:  All CPU’s that are not economically repairable are stripped for parts content. The parts are then used to repair other non-working units. Any component that cannot be salvaged is sent to a ISO 9001 compliant recycling center . NO equipment is sent overseas.”

I would urge local readers to visit this web page (http://www.cincinnaticomputercooperative.org/donate_recycle_computers.htm) and choose to donate their used or defunct computers, printers, monitors etc to the Cooperative:
See http://www.cincinnaticomputercooperative.org/donate_recycle_computers.htm

The video he shared is at the PBS Website at:

http://www.pbs.org/frontlineworld/stories/ghana804/video/video_index.html

Here are two more for you to watch:

www.youtube.com/watch?v=pr1zQrXM_7s

www.youtube.com/watch?v=pr1zQrXM_7s

www.youtube.com/watch?v=pr1zQrXM_7s

www.youtube.com/watch?v=Cxg7-oBcUiE

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We are: SCORE Cincinnati - For the life of your business

• The Best Price
• The Best Quality
• The Best Delivery

Please pick any two!

The above reminded me of one of my life’s experiences!

Many years ago I went on sales training with Varian Associates to be a Electron Device Group Sales Engineer. Ultimately I nailed the  job and became sales manager. One of the lessons I learned came from a character named Otto. The year was 1975 and folks who were at Varian in 1975 will remember Otto. He was a charismatic NY style sales character with rough edges and a heart of gold. Otto and I along with six or seven other Varian sales guys spent several weeks together visiting Varian’s plants i Beverly, Mass, Salt Lake City, Utah, Georgetown Ontario and Palo Alto California to name a few. Our job was to remain positive while countless product managers at these various factories droned on and on explaining why they should get a disproportionate amount of our time.

Otto had just joined Varian a few months earlier and had been a seasoned sales guy with R.C.A. (Remember them?). His sales tip really came from a single sentence. Well perhaps a couple of sentences.

He had just visited one of his old customers and he explained that when he was selling for R.C.A. that the one purchasing guy told him that Varian’s was getting his business because:

Varian:

• Had better prices!
• Had higher quality!
• Had better delivery!

Now he was visiting the same buyer who explained that he was giving the business to R.C.A. because:

RCA Now:

• Had better prices!
• Had higher quality!
• Had better delivery!

Makes you wonder how this happens?

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We are: SCORE Cincinnati - For the life of your business

I received an email a few minutes ago from Lowell Bowie, one of our Cincinnati SCORE counselors. The email included a PDF file entitled “The Anatomy of an Entrepreneur”. It was written by Vivek Wadhwa, Raj Aggarwal, Krisztina “Z” Holly and Alex Salkever.

I have to admit I enjoyed the read. If you click <here> you’ll enjoy reading the article.

Some of the highlights!

We asked company founders to rank the importance of a series of factors on the success of their mostrecent startups and to tell us what other factors were important.

• 96 percent ranked prior work experience as an important success factor; 58 percent ranked this as extremely important.
• 88 percent said that learning from previous successes, and 78 percent said that learning from previous failures, played an important role in their present successes. 40 percent said that lessons from failures were extremely important (the factor rating second-highest as “extremely important”).
• 82 percent said their management team was important to their success. 35 percent said this was extremely important.
• 73 percent said that good fortune was an important factor in their success. 22 percent ranked this as extremely important.

I suggest you read the full article (Click Here)

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We are: SCORE Cincinnati - For the life of your business

If you are still focusing the bulk of your advertising efforts on traditional venues such as print ads and direct mail, you could be missing out—and you’re definitely marching to the beat of a different drummer than most small businesses, reports a new U.S. SMB Spending Forecast by BIA/Kelsey. The study found that small and midsized companies (SMBs) are shifting their marketing budgets online.

By 2015, the study reports, 30 percent of SMBs’ marketing budgets will be spent on traditional advertising—a decrease from 52 percent in 2010. Here’s where the other 70 percent of their ad budgets will go:

• Digital/online media (this includes mobile, social, online directories, online display ads and digital outdoor ads)
• Performance-based commerce (this includes pay-per-click ads, daily deals and couponing)
• Customer retention (this includes email, reputation management, websites, social marketing and appointment-setting tools)

What’s more, despite the recession, U.S. SMBs are planning to increase their spending on media, marketing and business solutions by 12 percent per year—from $22.4 billion in 2010 to $40.2 billion in 2015.

Within that overall amount, online/digital media spending will grow the most, increasing by 24.9 percent by 2015. By contrast, traditional advertising spending will remain pretty much flat between 2010 and 2015, growing at just 0.6 percent annually.

What does this news mean to your business? First, I will admit that not one size fits all. So if you find that your current mix of traditional advertising is working for you, then great. But if you are saying that without ever having tried digital methods, then I urge you to at least give them a try.

“Digital marketing” sounds intimidating, but it’s really all about simple things like email newsletters, social media or building a basic website. These are things that in the 21^st century, every business should be doing—and as the BIA study shows, most of them are. Why aren’t you?

If you need help figuring out your marketing mix, a SCORE mentor can guide you. In Greater Cincinnati, visit the www.scoreworks.org site.

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We are: SCORE Cincinnati - For the life of your business

Everybody has witnessed the success of social-networking sites like Facebook and popular blogs that generate all their revenue off advertising. But as the Internet ages, that’s much harder to accomplish, says Martin Zwilling, a start-up consultant in Fountain Hills, Ariz., who specializes in helping entrepreneurs find angel investors.

Zwilling says he hears pitches for new social-networking sites about once a week, but actively deters people from starting them. “I say, skip it,” he says. “You need to invest $50 million to get any presence” in the social-networking space right now and it’s very difficult to get people to leave established sites. What’s more, he says, the amount of traffic needed to build a lucrative traffic-driven Web site is far more than most new Web entrepreneurs realize: “Until you get to the point where you have a million page views a day, you’re nowhere.”

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We are: SCORE Cincinnati - For the life of your business