Key Marketing Practices for Start-ups

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Marketing

Knowing how (and where) to look for help

Marketing has become a very specialized field, and there are talented resources available to start-up businesses in each of these specialty areas: Branding, Public Relations, Website Design/Development, Social Media, Search Engine Optimization, Market Research, and eCommerce Business Development.  Because there is so much more specialization for outsourced marketing help than for say outsourced financial resources, it is important that the start-up business owner have a point of view on what type of marketing resource he or she needs.

Starting with a marketing generalist might be a good first step – someone who can assess the business’ marketing needs, and what elements of marketing will be most gainful.

That said, a start-up business owner who can answer the questions listed below for him or herself will have a more fruitful first conversation with a marketing generalist.

  1. What is special about the product/service versus existing offerings? What characteristics will attract customers away from competitors?
  2. How could that specialness best be conveyed to potential customers, i.e., through branding, packaging, website, testimonial by “influencers”, word of mouth across peer networks, or point-of-purchase materials?
  3. Would sales be best driven through more of a “push” or “pull” strategy?
    • Push — contact potential customers/distributors one-by-one to close sales.   A push strategy would be sales intensive, so it could be that marketing spending needs to be kept minimal, to preserve budget for sales commission, brokerage fees, etc.
    • Pull — Create consumer awareness and demand so they will seek out a way to purchase product/service. A pull strategy would be marketing intensive.
    • Hybrid — Do some of both

If an owner is prepared with answers to these questions, the conversation with a marketing generalist should go quickly and either confirm, deny, or enrich the owner’s perspective.  It is also possible that if an owner feels they have a particularly strong  perspective on these questions then they may be able to save money and time by serving as their own “marketing strategist” and deciding on their own which strategy to employ and which specialized area of marketing is the one which would give them the best results for the spend.

Financial Management Report Cards Available

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I spoke at an Urban Manufacturing meet-up group being held on. Nov. 19th at ITAC’s office at 39 Broadway in lower Manhattan.   The meet-up group will meet again in January, for more information go to http://www.meetup.com/Urban-Manufacturing/events/218594846/

November 19th attendees had the opportunity to rate how their business is doing in these four areas of financial management:

  • Budgeting
  • Management Accounting
  • External Fund Raising Capability (as applicable)
  • Cash Management/Controls

If you are interested in seeing the material we discussed, please email me at david@rudofskyassociates.com to request a PDF copy.

Seven Steps to Doing a Breakeven Analysis for a Manufacturing Business

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A food industry client recently asked me to help them calculate their breakeven point, which is the Revenue they needed to achieve and be at zero profits.  Here are the steps I went through to complete the analysis:

1.  I reviewed their p&l from QuickBooks, to understand what was in each major category:

  • Cost of Goods Sold: ingredient costs, direct labor, and a third category which was called Fixed Cost of Production, and included all of the other factory overhead, such as support personnel, rent, insurance, depreciation, repair and maintenance, and so on.
  • Other Expense, which included outbound shipping, marketing and selling, office expense, and staff salaries

2.  I asked the client what was their ability to manage Direct Labor up or down, in response to higher or lower unit sales volumes and learned that he could do that to a fairly great degree. So in this cae I assumed that direct labor really had two components:50% was variable (i.e., would change in direct relations to sales/production), and 50% was fixed.   The % split may be very different for your business.

3.  Now it was time to create an Excel model to make this work easier to do, review and document.   I created an Excel spreadsheet with four rows:

  • Revenue
  • Variable Cost
  • Fixed Cost
  • Profit

Using the client’s actual 2011 p&l results, I populated this simple spreadsheet, so that the Variable Cost included the Ingredient Costs, plus 50% of the Direct Labor (see point 1) , while the fixed cost included 50% of the Direct Labor,  plus the Fixed Cost of Production and Other Expense.

4.  Next I inserted columns to the spreadsheet for Revenue at 80%, 85%, 90%, 95%, 105%, 110%, 115% and 120% of actual 2011 results.    For example, assuming that 2011 actual revenue was $2.0 million for this client, the spreadsheet would model possible results from $1.6 million to $2.4 million.

5.   I then went on to add formula which adjusted the Variable Cost in relationship to Revenue, taking it up or down by the same percentage from the actual 2011 results.   Fixed Cost was kept constant for all the lower and higher Revenue columns.

6.  In all cases, Revenue – Variable Cost – Fixed Cost = Profit, so I added this formula in the Profit row for all nine columns.  In this instance, it became immediate apparently where the breakeven point was.  If you are modeling a business that has Revenue that is either more than 20% above, or more than 20% below the breakeven point, you will have to broaden the range of possible Revenue outcomes to determine the breakeven point.

7.  This is a description how to do a very simple breakeven model, so is intended as a good starting point, not the final word.  There are a lot of additional considerations, that need more complex modeling than what I have described above, including the following:

  • Some of the Other Expense may also be variable, including shipping costs and brokerage expense.
  • In the real world, at some point increases in Revenue will max out the client’s current manufacturing capacity.
  • Direct Labor may go up and down in a step-wise function, e.g., when a second shift is added or eliminated.
  • Growing Revenue also usually requires additional working capital, for accounts receivable and inventories, which the company may lack, if it is cash constrained
  • Using the last complete year’s actual reported results is expedient, but may miss out on recent cost trends

Good luck doing your breakeven analysis!  If you have questions on the above, please post them in the comments section, or send me an email at David@RudofskyAssociates.com.

 

NY City Supporting Food Manufacturers in Meaningful Way

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Mayor Michael Bloomberg and City Council Speaker Christine Quinn both emphasized the importance of New York City’s food manufacturers when speaking at Baruch College this morning, the site of the NYC Food Manufacturers Business Expo.

Mayor Bloomberg addressing the NYC Food Manufacturers Business Expo

Bloomberg mentioned that food  represents a $5 billion industry in New York City,  responsible for 19,000 jobs, and employment growing at 14%.   In her talk, Quinn mentioned that NY City exports 7% of its goods and services, vs. 12% export of goods and services across the U.S., and the city is getting behind its food processors to help close that gap.  Seth Pinsky head of the NYEDC spoke next, about how his organization is working to bolster the chances of immigrants to succeed as entrepreneurs, given that they often lack a national network of contacts.

As a further show of support and interest in the food industry, the city today launched a new website: NYC Food.

Exhibitors at the Expo included Brewla Bars, Esposito’s Fine Quality Sausage Products and Davidovich Bagels, but as Mayor Bloomberg discovered when he showed up to make his remarks, no coffee.    One of his aides went across 25th street to grab him a cup.

 

 

 

Highs and Lows of Angel Investing Returns Revealed

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3M Company published the game Stocks and Bonds in 1964.  It is a stimulated stock market played out over a 10-year period, where the stock prices of fictional companies such as Metro Properties, Growth Corp., and Stryker Drilling oscillate up and down, determined by the roll of two dice, and the special events described by 36 playing cards. I was overjoyed when the game showed up as my birthday present when I turned 14, and was content playing it for a year or two, choosing the stocks more or less at random, but finally, I spent an entire afternoon doing the math to find out exactly which of the ten stocks provided the highest expected returns.   Fortunately, it was a pretty close horse race between three different stocks, as far as which one provided the best return, so the game wasn’t ruined, and I still had many enjoyable hours ahead playing Stocks and Bonds with children, once they became teenagers.

Although I am no longer playing Stocks and Bonds, I do from time to time help entrepreneurs seeking funding from angel investors, and I’m often asked what kind of returns these angels will want on their investment.   So you can imagine my delight in learning of a study done by Ramon DeGennaro and Gerald Dwyer, (and this took a lot more than one afternoon to complete) that analyzed the investment returns of 588 angel-funded companies, spanning the 1972-2007 period.

Their study, titled “Expected Returns to Stock Investments by Angel Investors in Groups” drives home the relationship between type of exit and investor returns.   Out of the 588 angel-funded companies in their data set, 408 companies had lasted at least a year, and then reached some sort of exit.  Of these 408, the 56 that went IPO, (i.e., issued stock to the public through an Initial Public Offering) were the stars, with average annual return to investors of 93%.  Another 180 companies were bought out privately, and their investors did almost as well, with an average annual return of 84%.  However, 114 companies in the study ceased operating, and their investors were nearly wiped out, with a negative annual return of 93%.   The blended Internal Rate of Return to investors in all 408 companies was 33.7%, but importantly, this did not include the results from the 180 companies that never reached any kind of exit, and were probably under-performers.

This terrific study helps explain why astute investors will always probe concerning exit strategy, and why they are also always concerned about the risk of the entrepreneur running out of cash before reaching break even, two things that weren’t concerns when playing my old childhood Stocks and Bonds game.  It also explains why entrepreneurs seeking angel funds need to be able to demonstrate that their company has the potential to yield an internal rate of return to investors of 35% or hopefully even more:  because investors need that kind of return on the winners to offset the losses from the ones that inevitably fail.