IncQuery: Where Are the Customers?
Experienced entrepreneurs often talk about the process of "finding the market." This month we hear about what that really involves. We also learn what investors are looking for these days, and we see the key ingredients of a sound executive-compensation program.
In Search of Clientele
I'm in the process of opening a unique educational facility in my town. We're offering preschool classes, after-school care, art classes, a math club, and a parent-resource room, among other services. The problem is, I can't get anybody to sign up. I've blanketed fairs and festivals with my information -- including bookmarks and games with our center's name on them. I have run newspaper ads and held open houses. We offer a price that's lower than our competitors' and charge no registration fee, but we have no takers. What else can I do? --Kathy
"Never assume you can't succeed in a business just because you get nowhere with your initial marketing attempts," says veteran entrepreneur and Street Smarts columnist Norm Brodsky. "I learned that lesson in my first start-up, a messenger company. I did a mass mailing, offering to do the first five deliveries for free, and got zero response. I was absolutely baffled, just like you.
"I called around, and finally one office manager agreed to see me. She taught me a very important lesson. 'Look,' she said, 'we do many deliveries each day. Five means nothing. I know the first 5 will be perfect, but what about the next 50? Besides, how long can you stay in business if you're doing free deliveries?'
"So the market was there. I was just trying to get customers the wrong way. I suspect that's your problem as well. Price is not the main concern of parents who are going to send you their children. Advertising isn't going to do much either. People have to know you, trust you, think well of you. They need to have a warm-and-cuddly feeling about you and your school.
"I'd start by putting myself in front of people. Try working through community clubs, social groups, churches, and synagogues. Word of mouth is very important in a business like yours. You can begin to build word of mouth by letting people see who you are. You might also do a brochure with testimonials from local people saying how terrific you are with children.
"Eventually, you'll have to bring people into the school. Before they enroll their children, they'll want to make sure it's a good, safe environment. That's where the open houses come in. At that point, price may be an issue, and no registration fees may be part of your sales pitch, but the real attraction has to be the school itself."
Measuring the Market
I'm on my second technology start-up and have run into a problem. Because of our unique product positioning, we fall through the cracks at the research companies. I've been told that we're in a great position for launching the product. The problem is, no information exists about how large our market is and the rate at which it's growing, so we might have trouble getting financing. We could hire a market-research firm to come up with the answers, but that would cost upwards of $25,000, which we don't have. I've sought help from former professors of mine at Wharton and a few well-known industry consultants -- to no avail. Do you have any ideas? --Carter
Yes. Stop worrying about it. "In the current climate, outside market research isn't a major factor in the decision-making process of start-up investors," says Martin Babinec, founder and CEO of TriNet, a five-time Inc 500 company, who works with growth companies and their venture backers. "That wasn't true two or three years ago, but things have changed. A lot of investors got burned. In the process, they learned that fancy research regarding the size of a market doesn't tell them what they need to know about a company's true potential. It's more important to gauge how interested customers are in buying what you're selling.
"So now investors want to see evidence of the demand for your product. You provide that evidence by going through the metrics of the sales process. What marketing activities (for example, how many calls) are needed to generate a solid lead? What percentage of leads turn into customers? How long does it take to move a prospect from the initial contact to a closed sale? What resources -- people, time, systems -- are required at each stage of the process?
"Even if you don't have a fully developed marketing or sales program, it's possible to construct a credible business model based on your record of signing up customers. With such a model, you don't need elaborate outside marketing data. When investors ask about the potential market size, you can offer your own reasonable estimate, and that's enough, provided you've demonstrated the interest level in terms of the sales metrics. Of course, investors are also going to be interested in the path to profitability, but that's a whole different area."
What Am I Worth?
I am 29 years old and the general manager of a retail business that was started in April 2000. The company's owner is new to the industry. He financed the start-up with his own funds and hired me because of my experience in retail sales and management and my five years as a manufacturer's rep. I currently manage all day-to-day aspects of the business including buying, retail sales, human resources, payroll, and accounting.
Since I've come on, the business has done well. Last year our sales grew 24%. We expect to break even this year, with sales of about $1.2 million. I believe I've been an integral part of our success, and I would like to be fairly rewarded. I left another job to take this one at a substantial cut in pay because of the opportunity I saw here. I currently receive a base salary and have been promised a share of the profits at the end of the year -- provided we have some. So how should I be compensated? --Abe
"Like everything else in business, compensation is a competitive issue, and you should begin by doing a competitive analysis," says Jack Stack, cofounder and CEO of SRC Holdings Corp., in Springfield, Mo., an employee-owned company that has pioneered innovative compensation systems. "You need to find out where your company stands in relation to companies in the same industry of approximately the same size. What are their sales? How profitable are they? What do they spend on payroll? How are their top people compensated? And so on.
"That information is easier to get than you might imagine. There's usually an industry association that collects the data. Your banker or stockbroker could also help you find what you need. In any case, I'd gather information about 10 to 20 businesses that are similar to yours and see where your company stands. Then I'd put together a bonus program that would reward you and your team for outperforming the market in specific areas -- after-tax profit, for example, or cash flow. The program would start paying out when the company moves above the industry average. The better you do, the bigger the payouts. I'd submit that program to the owner.
"There are a couple of principles involved here. One is that rewards follow performance. Another is that the company has to come first. As well as you think you've done, you need to recognize that your company's survival is still in doubt, which means that the owner's investment is still at risk. You'll have to do much more than break even if you're going to take advantage of the opportunity you refer to. Even after you become profitable, you'll have to make sure there's enough cash flow to support the company's growth before anybody gets a bonus.
"That said, I suspect the owner would be happy to reward you if you can demonstrably improve your company's chances of survival. Most owners would feel that way. So how do companies ensure their survival? By outperforming their competitors. If your company does that under your leadership, you differentiate yourself, and your price tag goes up.
"So I'd focus on putting together a good bonus program and then doing everything you can to hit the top levels for a couple of years in a row. At that point, you may be in a position to raise the question of equity."
Having Trouble Sleeping Lately?
Could you use some advice from an experienced entrepreneur who's been where you are and figured out what works and what doesn't? Send your questions to IncQuery@inc.com. Editor at large Bo Burlingham, aided and abetted by Norm Brodsky, will find the best people around to answer them. And if you don't like their answers -- well, you can tell us that, too.
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