IncQuery: In Search of the Dream Business

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"Suppose, for example, that in the first year it's going to cost you $39,000 to bring on this employee, including salary, benefits, Web-site upgrade, whatever. Suppose also that you have an average gross margin of 30%. (That's the percentage of gross profit you make on a sale, taking into account all the direct costs required to provide your service but not your ongoing overhead expenses such as your own salary, your rent, your Web-hosting fees, and so on.) In that case, you'd need to increase your annual sales by $130,000 at the same gross margin to cover the new expenses and maintain your current profitability.

"So you need to make your best estimate of both the expenses associated with hiring the employee and the additional sales you think she can generate. Bear in mind that adding staff almost always costs more than you expect. To make sure you have enough cash to get through the first year, you should probably have a cash reserve that is 25% greater than your estimate of the new employee-related expenses -- that is, $48,750, if you think that the first year's expenses will be $39,000. It may also be a good idea to experiment a bit before bringing her on full-time. Maybe she would be willing to work part-time in sales at first and continue doing her editing until you both have a better sense of the new arrangement.

"And one other thing: if your Web-site upgrade is going to affect her productivity as a salesperson, I'd make sure you do it before she goes on the payroll, not afterward."

Marketing 101
I own a small chemical company, and I've recently decided to focus all my energy and resources on one product: an all-purpose cleaner. I need some help in figuring out the most effective way of introducing it to the marketplace on an extremely limited budget. Should I go with independent sales reps? Distributors? Mail order? --Thomas

"There's no reason you can't try all three, as long as you're careful," says Chuck Sussman, who used reps, distributors, and mail order to build Pretty Neat Industries into the world's leading maker of cosmetics organizers. "Independent sales reps work only on commission, so they're cost-effective by definition. The trick is to find those who will represent you well -- calling frequently on your customers, ferreting out prospects you've never heard of, and stimulating sales with new ideas and promotions.

"For rep recommendations, I'd go to other people in your industry and to reps in other geographic areas. Once you have the reps you want, it will pay to work hard on developing good relationships with them. Aside from serving as your sales force, they can be a terrific source of information on competitors, industry trends, and market conditions.

"Distributors bring something else to the party because they tend to specialize both by region and type of customer. To avoid conflicts with your reps, you may have to create a separate package and label for the distributors. You'll have to decide for yourself whether the market potential justifies the cost.

"As for mail order, it's great for introducing an item to the market, creating retail demand, and generating cash flow -- provided you have the right kind of product. To do well in mail order, you need to come up with a dynamite ad that promises some kind of miracle. That's harder to do with some products than with others.

"Still, if you can afford the investment -- the cost of ads and maybe some professional help on the copy and layout -- mail order is definitely worth trying. Just be careful not to undercut the prices you're charging through your sales reps and distributors. And remember: there are many successful retail items that don't do well in mail order. So don't be discouraged if mail order doesn't work for you."

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 Street Smarts columnist 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.

The Whole New Business Catalog

IncQuery: In Search of the Dream Business
Marketing: Honeys, Hand Me a Polygamy Porter
Hands On: The Right Fit
Benefits: Taming the Health-Care Monster
Hands On: Not-So-Bright Ideas
Strategies: Radical Sabbaticals
Search: It's 2010. Bring on the Designer Babies

Please E-mail your comments to editors@inc.com.

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Bo Burlingham

Burlingham joined Inc. in 1983. An editor at large, he is the author of Small Giants: Companies That Choose to Be Great Instead of Big. The book was a finalist for the Financial Times/Goldman Sachs Business Book of the Year Award in 2006. Burlingham is also the co-author with Norm Brodsky of The Knack; and the co-author with Jack Stack of The Great Game of Business and A Stake in the Outcome.

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