In any startup the entrepreneur has made a set of assumptions of which their validity will determine the ultimate success of the venture. This is true for franchises as well. For example, a hamburger franchise in New York City may present sufficient revenue despite high aggregate franchise fees, however the same fees applied to the same franchise in Longview WA may present insufficient revenue to sustain the operation. Likewise in a service venture restrictions placed on a Franchisee’s territory in a highly dense market will typically be far less onerous to his income statement than the same restrictions would be operating in a rural market. In fairness some franchisors do a great job of appropriately scaling the costs of the opportunity (A readymade recognizable brand), and the allowed territory to the actual market provided. Others do not differentiate at all.
Very often we hear stories how someone who’s invested their life’s savings into a business only to discover that the unforeseen circumstances, like another business opens up close by, or people are loyal to a pre existing competitor and efforts to differentiate the business are not as effective as anticipated. Sometimes there just isn’t enough revenue to make the operation sustainable as things are. Adaptability in the product and/or service mix is key to success. It takes only a single false vital assumption to lose your stake in the game of business.
Vital assumptions gone wrong are the leading cause of business failures. This is one of the reasons I chose the cleaning industry as my first business venture. An example of a vital assumption for marketing: (One of twenty cleaning specialties outlined in my book: Cleaning for Profit) I decided to focus on the fabric cleaning niche in two affluent neighborhoods in Holland MI. So I used my formula to distribute the mailing (consisting of the right volume, distributed with optimal frequency and time interval) of a compelling offer for cleaning area rugs, draperies, oil paintings and upholstery:
“Our process is pet friendly, restores natural vibrant color, and furnishings are guaranteed dry within 20 minutes. Get any three items cleaned by an IICRC certified technician for just $99.00 Expires 11/15/2002. Some restrictions apply.”
My focus in Holland MI was just one piece of an overall marketing mix and multifaceted strategy. This program is from a market ninety miles south of my homebase in Ludington. Let's see what can happen when a vital assumption is wrong:
Bobby Dalton launched FabClean making the vital assumption of forecasting a 1% return on a volume of 30,000 direct mail pieces (per month) at the cost of $2,200, for eight months. (240,000 pieces total) After the eight month period Bobby had received only .002% return or .002(30,000) = 60 new clients (Including those who came from the multiplier effect of referrals which he diligently ask for at the end of every job). Sixty clients with an average sale value of $99 = $5,940. The mailing was Bobby’s whole game plan and Fabclean is now a sunk cost. The customer acquisition cost being $2,200, the cost of servicing customers (COS) fuel, cleaning agent, labor etc., combined with overhead (liability insurance, business licensing, office supplies etc.) for the eight months was $3,780) For a grand total of $5,980. Bobby had a net loss of $40.00 and that is doing all of the work himself without pay nor having to pay rent.
Bobby’s experience proves that there must be sufficient capitalization and planning built into the vital assumptions of a startup. A feasibility study for a business is multi-faceted. If you think that it is going to take ten grand and eight months to gain revenue sufficiency, you had better plan to have twenty thousand and sixteen months of capitalization just to be sure. That is to say cushion your vital assumptions, and then track performance while there is still ample time to adapt to unknowns.
In the example we have an independent startup which does not have arbitrary restrictions on territory boundaries. However keep in mind that there are still costs involved in traveling. A good plan includes clustering work for the same general area on the same day when possible. Additional travel charges over a certain distance may also be warranted. Now let’s take a look at some better conceived vital assumptions:
A quadrupled direct marketing campaign like the one Bobby used above (i.e., using optimum inputs) will yield 200 customers in one year.
Planned sustained attendance to a few professional business organization like Business Network International, and the Chamber of Commerce, will provide networking opportunities worth 25 percent of my new business in the next twelve months.
Consistent quality canvassing of commercial districts with printed business cards, especially concentrating on those in key positions to refer work will produce twenty thousand dollars of income within six months.
This is a winning marketing strategy.
The sponsoring vital assumptions in the second marketing plan are better conceived for a successful outcome, they create a brand through consistent presence over an extended period of time, covering sufficient territory, and sustained quality sales effort, assuming that one is delivering quality workmanship at an acceptable price. A customer feedback with a subsequent follow up quality insurance call is used to track and strengthen customer satisfaction. The plan could be strengthened further by adding one or two complimentary services to the marketing mix. It might something as simple as offering general office cleaning or it could be one of the other 19 less known niches covered in Cleaning for Profit. Planning and testing with actual polling, or simply by asking informal questions beginning with one’s circle of friends will help to ensure that one’s vital assumptions are on target.
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