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Entrepreneurship Training – Session 4

SESSION 4

Research

Session Outline 

Objective

This session is the preparation for writing the business plan. At this stage a business idea has passed an initial screening, is found to fit in the community and is also a passionate obsession for the entrepreneur. Now we focus on detailed research that will be used in the business plan. The objective in this session is to gather the research needed in order to develop the business plan.

Learning points
  • Learning the various types of research
  • Understanding what research is needed for the business plan
  • Developing a revenue and profit forecast
  • Developing a customer survey
  • Finding sources of information for research
  • Assessing feasibility

Research
Concept

Entrepreneurs often work with their own intuitive sense of what will work and what won’t. They frequently base their commitment on years of experience, in an industry, that gives them a “gut feeling” that their business opportunity will work. They can’t express it written or orally, but they just know the idea will work.

This is never a problem when the entrepreneur is going to take all the risk and does not require the investment of others to implement the idea. When others are involved, however, the entrepreneur has to prove to them (with a business plan) that the idea will in fact work and should be supported with funding and other resources.

Many entrepreneurs get a “gut feeling” for a business idea. Once an entrepreneur is “ignited” to start a business they are like children waiting to go on an outing – they have no patience to wait and they can’t understand why everyone else is not as anxious to start as they are. Preparation is not important; they just want to get going. All entrepreneurs are similar in that they have a “bias for action” – they don’t want to write it or talk about it – they just want to do it!

As mentioned before, whenever others are involved in the business (partners, investors, etc.) they want to see the proof that the business will work. That’s why many entrepreneurs decide to start small and use their own money for start-up because they don’t have the patience to wait for agency funding (and the paperwork) nor the investor questions and request for documentation. When they become successful and they need to get a loan for expansion, the lending institution will ask for their business plan – that’s when they finally have to develop a plan to satisfy the lending institution’s criteria.

When looking for support right at start-up you need to produce a business plan. The business plan is the evidence that there is an opportunity and it details your strategy to develop a business for that opportunity. That’s why research is such an important element – it is the way in which you prove the following:

1) There is an adequate market for your product/service

2) You understand the competition and their strengths/weaknesses

3) You understand the industry and the trends in that industry

4) You understand your customers’ purchasing patterns

5) Your location choice is based on research

6) You know what your expected revenues, costs and profits will be

7) You have the right resources to pursue the opportunity

8) You and your alliance network have the capability to run the business

Research, and a business, plan is very important in satisfying the investor demands. A business plan is your own map that focuses your decisions. (Taking a trip to an unknown location is so much easier with a map). Many entrepreneurs regret not doing a business plan – they feel they could have achieved more in less time if they hand done a plan. Research, and a business plan, helps to transmit the entrepreneurial vision to others, such as employees, suppliers and customers.

Research is an extremely important part of becoming an entrepreneur. Many entrepreneurs are doing informal research on a daily basis and know precisely what is going on with the competition, the industry and the customers.

Case study
Goodleaf Auto Parts

Brian Goodleaf does research on a daily basis. He does his research driving to work ( observing the competition ), having breakfast at the local restaurant ( talking to community people ), talking to customers at work and talking to parts dealers who keep him up to date on industry trends.

Brian is constantly in touch with his market. He uses this information to position his business, take early advantage of opportunities and keep current with changes in the industry and community. Constant research, daily, is necessary to stay current with your market.

When starting a business you need to get the preliminary information about your market in order to plan your entry. There will be fewer surprises and, in some cases, the research will provide you with the information that gets you to change your original business model, which will save you a lot of aggravation later on.

Going on a trip, constructing a building and a number of other activities need a plan to get started. Going into business needs a plan also. This session is designed to help you get the research information you need to begin to develop your business plan.

Research required and types

There are four key areas for research and two types of research needed. The two types of research are:

1) Primary (observation, surveys, interviews, focus groups, etc.)

2) Secondary (Published data – Stats Can. Mohawk council, etc.)

Primary research is any research that you do yourself. Brian Goodleaf, in the previous example, was doing primary research every day. Some primary research methods that would be helpful to gather data for your business plan:

  • Talk to someone who works in the industry to find out more about what is required to be successful.
  • Talk to potential customers about their purchasing patterns
  • Distribute a survey to potential customers to find out their purchasing patterns
  • Go to the competitor’s place, or purchase the competitor’s product/service to find out why they are successful
  • Have a focus group to determine what the customers want in your product/service
  • Talk to suppliers, distributors and other potential alliance partners to find out what they will be charging you to sell you supplies or for them to make, sell, and/or deliver your product.

Secondary research is information that has already been compiled and you can have access to. Some information that is available, and may be useful, for your business:

  • The make-up of the Kahnawake population (number of households, number of males and females by age groups).
  • Number of vehicles that cross the Mercier Bridge by hour and by direction.
  • The leakage survey contains information about the total size of a particular market and the amount of that market that is buying in Kahnawake ( direct competitors )
  • Statistics Canada has information on the per capita consumption for various products/services
  • The Internet is an excellent source of information. Searching under a variety of keywords and using the links found on sites can provide good data.
  • Kahnawake business directory to find the competition
  • Eastern door to find external  competition that advertises in  Kahnawake

 

There are four key areas to apply the research toward. These areas are:

1)   The Industry (e.g. food, recreation, auto, etc.)

2)  The customer niche (e.g. male, age 21-25, single, living at home, etc.)

3) The competitors (direct/indirect)

4) Your internal costing (cost of goods sold and overheads)

(1) The Industry

You can get some published information on the trends within your industry. What you need to find out is if the industry is expanding, staying the same, or decreasing. This should be expressed as a percentage { e.g. The Montreal Gazette (Oct. 23,2000) reports that organic food demand is growing by 20% per year and people are willing to pay 25% more for organically grown produce}.

You can get primary information by interviewing an acknowledged expert in organic farming or doing a mini-survey with some potential clients.

Every industry has an association that has significant information on that particular industry. They may have newsletters or other publications. You may also be able to call and ask questions to someone in the association. They are usually willing to supply you information because you will become a member of the association once your business gets started.

Another good source of data, on an industry, is the suppliers to businesses in that industry. Suppliers are always interested in helping potential clients and they have excellent knowledge of the industry and the businesses in it. Another good source of information is from retailers who carry the product – they can tell you how well it has been selling and who is buying it.  You need to get a good understanding of:

–          The size and growth pattern in the industry

–          A determination of the market niches within the industry

–          The consumer trends

–          Recent innovations

–          The repeat purchase cycle to learn how frequently customers will re-buy

(2) The Customer

The most important decision about entrepreneurship is the selection of the niche market you will be serving. Often, entrepreneurs start a business on the basis of their own interests and wants. This is good for internal motivation but, as mentioned before, there has to be a consumer demand for the product/service for the opportunity to be feasible. So, even if you do start a business based on your own wants and needs, there will be a certain market segment that the product/service targets. You need to determine if the segment will provide adequate potential for business survival.

You need an excellent understanding of who your customer is, how many potential customers you may have, what they want to purchase, how often they purchase, when they like to purchase and what they expect from the business they deal with.

You can get good data on your target niche from your Business Services Officer.

Excellent primary research can be done by speaking to potential customers (those that fit the profile of your niche market). This can be done individually or as a focus group of potential customers.

Surveys are another way of gathering information. You need to get information from potential clients that answer the following questions:

  • Have they ever purchased a similar product/service?
  • What is the most important feature that makes their decision to purchase? ( Price, quality, convenience )
  • How much are they willing to pay?
  • How often will they purchase?
  • When do they make their purchases? ( Day of the week, time of the day, month of the year)
  • What would entice them to switch to purchase your product/service?
  • Do they work? Full time or part time?
  • What newspapers do they read? What sections in the newspapers?
  • What radio stations do they listen to? What time of the day?
  • What groups/associations do they belong to?

The concept is to get information that will help you do your revenue projections and also begin to develop a marketing plan by finding out how and where to reach them and what to emphasize in your marketing message. Naturally, to get information about their purchasing habits you need to provide an incentive. You can provide the food for the focus group meeting, give free samples of your product/service, or offer them substantial discounts to try your product/service.

(3) Competition

You need to find out who is the direct and indirect competition for your business. Direct competitors are those that compete for exactly the same clients as you (e.g. another restaurant). Indirect are those businesses that provide alternatives for your potential clients (e.g. a grocery store that sells food which encourages people to cook at home rather than go to your restaurant ).

In the service industries, the do-it-yourself companies are your indirect competition. If you do lawn mowing/snow removal then an indirect competitor can be Sears or Canadian Tire who sell lawnmowers/snow blowers so people can do it themselves and not need to use your services.

The size of the competition is also a factor. A large competitor can usually sell for less because of the economies of scale. They can also carry a wider variety of products.

One critical aspect of researching the competition is to avoid arrogance and intimidation. Every business has strengths and weaknesses. You need to gather data that will indicate to you where the competition is strongest (what are they doing that has caused them to be successful to this point). You also need to research their weaknesses to find the gap that will allow you to penetrate the market.

Some of the best techniques to assess the competition are through personal observation. This primary research can be done by posing as a customer or having someone you know to pose as a customer. Focus, initially, on what makes this business successful, then look for gaps in the product/service or some other feature of the business operation.

Secondary research on the competition is available from the community business directory where you can find out how many direct competitors you have. Coupled with the leakage study, this can give you an indication of your impact on the industry in the community. If, for example, there is $500,000 worth of sales in this industry in the community and there are 5 existing businesses, then each is getting around $100,000 per year. If you enter the market, now there are 6 businesses and the average, per business, goes down to around $83,000. This may cause some of the competition to go out of business and they’ll be particularly upset if they found out you were funded to start your business.

So, in this particular case, you will need to show how the market is growing to accommodate your business or that your business is highly differentiated from the others so that you will be attracting new customers to increase the total size of the market.

(4) Internal costing

Internal costing is the determinant of profitability. An entrepreneur who controls his/her costs will have a competitive advantage over others. There are three types of costs that are essential to research:

a)   Cost of goods sold – This is the direct cost of the product/service to you. It can be purchases or it can be the materials and labor it takes to make or provide the product/service you sell.

b)  Variable costs – Those costs that will vary with the level of sales. When there are no sales then the variable costs will be zero. The cost of goods sold (above) is a variable cost. Variable costs can include gas, salaries that are paid on a commission basis, utilities (phone, electric).

c)   Overhead (fixed) costs – These are costs that must be paid, even if there aren’t any sales. Costs like rent, loan repayment, hourly salaries and maintenance.

Forecasting revenues

Based on your research you should be able to calculate your expected revenues. This is perhaps the most important calculation in the business plan because it is your evidence that a market exists for your product/service. Most investors and funding agencies will focus on how you developed this estimate to see if you used appropriate methods. In situations where you will be selling to one or two major customers (e.g. distributors) then you should also provide letters of intent in the business plan appendices to support your projections.

There are 3 elements to a revenue forecast:

  • Your projected market share
  • The expenditure per person per sale
  • The amount of times each person will purchase, on average, each year

So let’s say, for example, that your target niche is women in Kahnawake who are 25 – 40 years old, and are married with children. Suppose there are 1,000 of this niche market. Let’s also suppose you find they purchase, on average, once a week and each time they spend $20 on the product/service.

There are already two competitors in the market, and at present they have all the market (100%). You will be offering a better product at the same price and you expect to capture 10% of the total market in year one.

  • So your market share is 10% of 1,000 women = 100 in year one
  • They purchase, on average, $ 20 per visit
  • They buy 52 times ( once a week for a year )

Revenue projections are 100 x $20 x 52 = $104,000 annually

Forecasting profits

In the above example, we now have Gross Revenue projections of $104,000 annually.

Assume that you are selling a product that cost you $10 and is being sold, by you, for $20. So, your costs of goods sold are 50% of your sales. In this case, 50% of $104,000 = $52,000

Your Gross Profit is now $104,000 ( gross revenue)  – $52,000 ( cost of goods sold ) = $52,000 gross profit

Rent, vehicle, cell phone and your salary of $300 per week total $40,000 per year in overhead expenses.

Your Net Profit is now $52,000 ( gross profit ) – $40,000 ( overheads ) = $12,000  (N.B. No loan in this example)

SUMMARY

Entrepreneurs often rely on intuition rather than market research. They are anxious to get started, to take action rather than passively research the business opportunity. Business failures can be reduced through good research and the findings help the entrepreneur position his/her business opportunity.

There are two types of research. Primary research is done by observation, interview and survey. It is research that is done by the entrepreneur which is unique for his/her opportunity. Secondary research is information that has already been compiled. It can be looked up in a book or on the Internet. Both are necessary to do a thorough research analysis.  Areas for research include the following:

  • Industry
    • Trends
    • Changes
    • Technology
    • Seasonality
  • Market
    • Niche
    • Size
    • Share
    • Per capita expenditure
  • Competition
    • Direct/indirect
    • Strengths/weaknesses
    • Gap
  • Internal
    • Cost of goods sold
    • Variable costs
    • Overheads
MARKET RESEARCH
SOURCES ON THE INTERNET

Starting  point for research. It has methodologies and also by country.

http://www.rba.co.uk/sources/stats.htm#canada

 

This site has access to information about various industries ( e.g. arts and crafts ). You can also look at emerging sectors to get ideas on business opportunities. If uncertain, click under “list of all industry profiles”.

http://www.hrsdc.gc.ca/eng/home.shtml

 

Industry research by sector

http://strategis.ic.gc.ca/sc_ecnmy/sio/homepage.html

 

Excellent site for researching industries. Considerable detail once you select industry.

http://www.ic.gc.ca/eic/site/cis-sic.nsf/eng/home

 

This site provides information on household spending patterns. You can get per capita consumption data, expenditure patterns and population statistics.

http://www.statcan.gc.ca/subject-sujet/theme-theme.action?pid=3868&lang=eng&more=0

 

Global Canadian data on a variety of areas, including population characteristics and the economy

http://www5.statcan.gc.ca/cansim/pick-choisir?lang=eng&p2=33&id=2030022

 

This provides profiles on Canadian communities. Once you enter a community and a province the first set of data will give you a profile of the community. Clicking on the “population” link on that page will give you a detailed breakdown of the population.

http://www12.statcan.ca/english/Profil01/PlaceSearchForm1.cfm

 

This site has free documents on market research in the Canadian market

http://www.statcan.ca/cgi-bin/downpub/freepub.cgi

Other sites of interest and research

http://www.cfib.ca

http://www.infoentrepreneurs.org/en/

http://www.inc.com

http://www.smallbizsearch.com

http://www.entreworld.org

http://library.concordia.ca/

http://www.bplans.com

http://www.bizplanit.com

http://www.sb.gov.bc.ca

http://www.mic.gouv.qc.ca

http://www.bdc.ca

http://www.yesmtl.org/index.html

 

EXERCISE # 1

 

Think of a business that you purchase from regularly. What is it that makes you go back to them over and over?

Business____________________________________

 

What do you purchase_______________________

 

How often__________________________________

 

How much do you spend each time_____________

 

Why are they better__________________________

 

How did you find out about them______________

 

When do you go______________________________


EXERCISE # 2

 

Who is my customer?

 

 

 

How many are there in my trading area?

 

 

 

How many are interested in purchasing?

 

 

 

What % of market share can I expect to get?

 

 

 

Why will they buy from me?

 

 

 

Who is the direct/indirect competition?

 

 


EXERCISE # 3

There are some basic questions that should be answered when surveying potential customers. The following information is needed from a survey. Using this as a guide, develop a survey to distribute to to your potential clients:

1)   Demographic data – use whatever is applicable in your case. (Age, sex, gender, income, marital status, children, where they live).

 

2)  Psychographic data (why do they purchase? Is it for quality, price, and convenience?). Would they switch to a new brand or new business? What improvements would you like to see in the product/service?

 

3)  Buying behavior – How often do they purchase? When do they purchase the product/service (seasonality)? How much is the usual expenditure? Who else influences their decision? What newspapers, radio stations do they listen to?


Discussion Questions 
  • The competition will not stay inactive when you enter the market. Your original research may show that they are selling at $5 a unit, but, after you start your business they may put on a sale at $3 a unit to ensure that you don’t get market share. How can you deal with this?
  • Some entrepreneurs enter an exciting industry that has high growth and seemingly high profits. Unfortunately, these often turn out to be “fad” products/services that have a short life expectancy. How can you determine, when researching, if a product/service is a fad or a legitimate sustainable business opportunity?
  • Discuss some methods on how you can do market research to determine the acceptance of your business opportunity in the community? Will it fit in the community culture?

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