I am writing a blog series on how to start a business. If you’d like to review previous posts on this series, you can find them here:
So You Want to Start a Business
Revenues, Direct Costs and Expenses… Oh My!
How Can You Earn More Revenue without Spending More Time
Direct Costs and Gross Margin
Keep Expenses LOW!
Profit is NOT an Ugly Word
Creating a Financial Forecast
Sanity Check – Does your Business Make Money?
Ok… So you have finally created a financial forecast that makes you money. Now you’re ready to go out and execute, right? Wrong…. very wrong. Just because the math works out, it doesn’t mean you can execute this plan without some major tweaks. The next step in your developing your new business is doing market research. Some small companies think that market research is only for the large companies who can afford large divisions of marketing folks and expensive statisticians. Or, marketing people create advertisements… and since I don’t have money for such a waste, I can’t do marketing research.
The marketing research that I am talking about is not a bunch of numbers, statistics and demographics. If you have the budget to do such things, that’s great. I am talking about simply connecting with your target customers and testing assumptions in your current financial forecast. Small businesses need to go directly to their customers and simply ask them questions.
You can either buy a list of email addresses and phone numbers; or search for your target customers on the internet and call them up. You have to be aware that people do not like to talk with sales people; but they are much more open to describing their own desires. There are three elements that are critical when doing your market research:
- Don’t sell anything.
- Ask open-ended questions.
- Test financial forecast assumptions.
Don’t Sell Anything
People will quickly flip the channel on TV when a commercial comes on. They will hang up their phone, if they have one hint that the person on the other end of the line is a sales person. They may still hang up on you if you are a market research person, but you have much better odds, if they feel like you are not reaching into their pocket for their hard-earned money.
Ask Open Ended Questions
An open-ended question is any question that cannot be answered with a yes or no. When we ask close-ended questions we are trying to force a person into our way of thinking. In market research, you want to know your customer’s way of thinking. Let me give you an example: Close-ended-question: “Would you pay $400 for a high speed toaster?”; Open-ended question: “What would you pay for a toaster that could double toast output?” The open-ended questions allows the client to give an answer that reflects their value…. not yours.
Test Financial Forecast Assumptions
Let’s say that you assume that you can sell 20 $400 high-speed toasters each month; once your business is up and running. I just told you that you should not ask close-ended questions. So if the person in your call says they would pay $300 for a high speed toaster as you have described it, then you may want to rethink your business plan. If your prospective client says they would pay $300, DO NOT try to convince them that your toaster is worth $400. You may need to either figure out how to reduce your selling price; or you will need to work on a better marketing campaign to convince prospective buyers that your toaster is worth $400. Either way, your financial forecast will need to change. Any product or service that requires a lot of customer education, will require that you invest the funds to educate your target market.
Example Marketing Scripts
I am going to give you a few example market research scripts that you may consider.
Example #1: Your company sells a new high speed toaster to the restaurant market:
Introduction: Hello, my name is John Smith. I wonder if you have a few minutes to answer some market research questions about your business?
Question 1: Can you name the top three problems you have in serving your customers in the morning breakfast rush?
Question 2: What would you pay for a toaster that could double your morning toast production?
Question 3: How often do you purchase new kitchen appliances?
Question 4: What purchasing medium do you prefer (ie. internet, supplier, other)?
Question 5: What trade shows or vendor events do you attend?
Example #2: Your company sells corporate-housed daycare services to working parents:
Introduction: Hello, my name is John Smith. I wonder if you have a few minutes answering a few questions to help me with a workplace daycare service I want to provide?
Question 1: How many children do you have and what are their ages?
Question 2: What benefits would you experience, if your daycare service was located in your office building?
Question 3: How much would you pay, monthly for an office-located daycare service?
Question 4: List three top needs you have with your daycare provider?
Question 5: How many days are your children in daycare per year?
Don’t get discouraged if people hang up on you or don’t return your emails or phone calls. Set your expectations early that 1 response out of 10-calls is a reasonable success rate. Also, don’t settle for people answering your questions who are not the ultimate buyer of your services. If at all possible, try to visit your prospective clients in person. Be highly respectful of your client’s time. If you have a prospective client who is a chatter-box, don’t stop them from talking…. unless you have gotten too far from your intended task. In many cases, you will not have all of the right questions. A chatter-box may actually help you modify your script to ask more relevant questions; or fill you in on information that is relevant to your ultimate business plan. Always thank your clients profusely for taking your call, email, or personal visit.
You may get some responses that are down-right depressing. Such responses include:
A competitor already offers this product/service for a very low price.
Your product/service is really not valuable to me.
Your product is idiotic and I would never buy such a thing.
You had hoped that you provided a unique and valuable product and or service to the marketplace, but your prospective clients may give you responses that deflate your hopes. Don’t get down about such responses. And don’t try to convince your prospective client otherwise. It is much better to get your bubble burst early than to lose a lot of money and time pursuing a flawed business mode. Learn to appreciate negative responses. One other thing. Often times, new business owners make too big of a deal out of negative responses. The reality is that many people in your target market may not want your product or service. You need to assess if your negatives can be overcome; or if you can make your business work with a fraction of positive responses you are getting in your research.
Positive Follow Up
It is quite common for clients to express interest in your product or service once you have finished your mini-interview. There are two reasons for this reaction: 1) customers want to do business with companies that express genuine interest in them… by asking questions and not pitching a product or service, you will prompt more interest in your company; and 2) you may actually have a product or service that is needed in your market place. Be responsive to these inquiries. If you plan to offer a seminar; or a free service; or plan to offer your product/service for sale in the next few months, get their contact information so that you can follow up.
Resist Crunching Numbers
I am an engineer, so I love to put everything I do into a cool statistical model. If you are trying to raise a million bucks from some investor, it may help to quantify all of your market research. Otherwise, don’t do it. The fact is that you probably solicited only 10% of a minor portion of your target market to respond to your questions in the first place. Try to get a sense of how your customers feel about your new product/service. Then make the appropriate adjustments to your financial model.
In addition to testing assumptions you made in your financial model, listen to your customer for ideas that can help you position your product better. Let’s say that you hear a lot of complaints from your prospective clients in your conversation about how their toasters break down all the time and they are constantly having to make toast in their ovens as a result. You can use this tidbit to advertise how reliable your toaster is when you start your advertising campaign.
In our next post in this series, we will talk about executing your business plan. Planning can be fun… but it doesn’t pay the bills. Stay tuned.