Statistics have long confirmed that
nearly 80 percent of all start-up ventures never make it to their fifth anniversary. The upside to these failures is
the plethora of case studies available for
review; information that holds the key to
pumping a new venture’s success rate up
closer to 50 percent. For instance, a long-term review conducted by Ph.D. students of
200 successful start-ups revealed that not
one of them had gross margins lower than
the average of their industries.
“In a start-up venture, you presumably have
something that nobody else has,” says Dr.
Charles Hofer, Regents Professor, Coles
College of Business, Kennesaw State University. “Now, if you can figure out who your customer really is, they’ll pay the premium prices
required to sustain a successful start-up.”
Smart Business asked Hofer about how to
avoid the most common start-up traps.
What are the top three marketing and financial mistakes for new ventures?
There are several mistakes made by
prospective entrepreneurs regardless of
industry. The most significant of these
include charging too little for the products
and services, failing to create ‘just noticeable differences’ in your products and services that differentiate them from the products and services offered by your competitors, and failing to limit the credit extended
to customers and monitor accounts receivable closely. A sale does not occur when you
ship products to your customers; it occurs
when they pay you. Since the gross margins
on most products are less than their full
costs, this means that it may take two or
three ‘good’ customers to make up for just
one ‘deadbeat.’ Large companies operating
well above their breakeven points may be
able to afford to take such risks. Most new
ventures that are working hard to reach
breakeven cannot.
How are proper and sustainable prices determined?
There are three factors that must be considered in setting your prices. The first is
costs. Except for overstocks of seasonal
items, you must charge enough to cover the full costs, both variable and fixed, of the
items you sell, which means that you must
have an accounting system that provides
reasonably accurate estimates of these
costs. Second, you need to know what your
competitors are charging for their products
and services. This does not mean that you
should match them. In most cases, you
should not. But their prices may set an upper
limit on how much more you can charge
than they do. Most customers will be willing
to pay a premium for products and services
that better serve their specific needs — up to
a point. That point will be determined by
your competitors’ prices and the magnitude
of the benefits that you provide. The third
factor is the specific benefits that you provide that your competitors do not.
Won’t high prices limit sales?
Yes. But not as much as one might think if
the new venture is pursuing the appropriate
set of initial target customers. Having lower
than average margins for your industry may
be the ‘kiss of death.’ New ventures will do
many things exceptionally well, but they will
also make many mistakes, and high margins
provide the resources needed to pay for
these errors. Second, and more importantly, you should be providing benefits other than
low prices to your initial target customers.
Where should new ventures first focus their
marketing budgets?
Most new ventures should use variable
and/or no cost marketing methods whenever possible since the lower you can make
your breakeven point, the greater your
chances for a successful launch. It is crucial
that you identify and focus on those customers who currently have an absolutely
compelling need for your product as well as
the ability to pay for it. Seldom is this the
largest segment of the market. The best way
to do this is to talk with as many different
potential customer groups as possible.
Surveys will seldom, if ever, do the job.
Once you have identified this initial target
customer group, you need to develop a set
of unique selling propositions built on the
‘just noticeable differences’ of your products. Wendy’s original ‘Where’s the Beef?’
advertising campaign was one such unique
selling proposition that was built on the fact
that Wendy’s had square burgers that could
be seen hanging over the edge of the bun.
Can a new venture grow too fast?
Absolutely. In fact, one of the most significant problems for companies that survive
start-up is growing too rapidly, which frequently leads to exceptionally poor customer service followed too often by bankruptcy. One of the best ways to control
growth is to increase prices. Not only will
this limit the growth in sales, the increased
margins generated by such higher prices will
flow directly to the bottom line and help pay
for the additional resources needed to supply and service the additional new customers who are willing to pay the increased
prices. Another way is to cut back on the various sales and marketing activities that generated the growth in sales. This is more difficult to do, however, and does not help identify those customers for whom your products have the greatest value and those who
will pay higher prices to get them.
DR. CHARLES HOFER is a Regents Professor in the Department of Management and Entrepreneurship, Coles College of Business,
Kennesaw State University. Reach him at (770) 423-6000 or [email protected].