How Poor Forecasting Can Sabotage Your Business Plan

business planHow Poor Forecasting Can Sabotage Your Business Plan (And How to Avoid the Pitfalls!)

Introduction

I met with a friend recently who shares my interest in launching and funding startups.  He told me an interesting story that resonated at many levels.  It went something like this:

Back in the 1980s, when he was seeking his first financing, my friend had lunch with a senior partner at one of Silicon Valley’s top venture firms.  During lunch, the VC paused, looked my friend, and said,

“There are three types of companies we end up investing in whether we like it or not:

  • The “Dead On Arrival” – those who never make it beyond their initial funding before going belly-up
  • The “Living Dead” –those who somehow manage to avoid going belly-up, needing more and more investment capital just to stay on life-support, and
  • The “Home Runs” those who so far exceed our hopes and expectations it makes all of the others worth the trouble.”

The VC went on… watching my friend wonder which category his company might fit in to.

“Most of our portfolio companies end up in the first two categories — “The Dead and the Un-Dead”…  Nine out of ten, I’d say, and these are the ones we didn’t reject off-hand!  But, once in a great while, we’re lucky enough to  invest in a “Home Run” — a really great startup that helps us to absorb all of the losses from the others, and make a handsome return for our partners and for us.  That’s why I’m buying you lunch!”

The VC paused, then asked my friend, “But do you know what one thing all of these companies have in common?”  My friend put his fork down and shrugged his shoulders, waiting for the VC’s answer.

The VC smiled and took a deep breath…

“None of these entrepreneurs had the faintest idea about how to realistically forecast their company’s financial performance!”

business plan forecast

“If I see another hockey stick forecast this week, I’m going to throw something at somebody.”
Exasperated Venture Capitalist

My friend learned from that lunch what I have also learned in my years of launching and helping fund startups — that few, if any, good investors believe the forecasts presented to them, due mainly to the fact that few entrepreneurs understand the importance of realistic forecasting.

In the words ahead, I will share with you some of the major ways poor forecasting can sabotage your business plan and your financing.  I will also share some of the lessons I have learned about how to avoid these pitfalls, and secure the financing you need to launch and grow your enterprise.

Forecasting: The Forgotten Part of the Plan

I frequently read detailed multi-page start up business plans with pages of description and financial detail of every line including details such as paper supplies and print ink.  However, one of the most important drivers of the plan — the forecast — is often comprised of a few paragraphs or less.  In point of fact, forecasting is often relegated to a minor role in the business plan, and often key elements are overlooked.  Examples include:

  • One client forecasted a one percent sales growth per week based on what a venture capital firm told her was required for financing
  • Clients frequently ignore competition and pricing details, including the role of online distribution such Amazon and Ebay in developing their forecasts
  • Market forecasts frequently ignore key market segments and niches.  For example, premium customers and products frequently represent less than 10-20% of a plan’s total market.  Mass merchants, such as Walmart and Target, can represent 30-60% of a retail product market while boutiques and specialty retailers may be inconsequential.

The process of giving the business plan forecast its deserved place is not easy.  This is so for many reasons, including:

  • Forecasting is difficult (if not impossible) to do accurately.  Key assumptions required for good forecasting are not always evident, and key metrics are not always clear. In the absence of a clear path by which a forecast might be developed, many entrepreneurs gloss over it.  For example , the most reliable and recommend tool for forecasting is a company’s own historical track record, which is simply not available for startups.
  • Forecasting is easy to over-simplify.  The proverbial “Hockey Stick” graph of revenue growth is a classic example of this.  The fast growth rate looks impressive on the surface, but the entrepreneur’s lack of restraint leaves the opposite impression with investors.  The steeper the pitch of the hockey stick revenue line, the more investors will question the entrepreneur’s business judgment.  I read a plan a short time ago that had 20 beautiful pages of financials and charts based and about one paragraph on the assumptions behind the forecast coupled with — you guessed!  The Hockey Stick.
  • Forecasting is often not based in reality.  Demand, competition, market size, pricing, marketing expense, etc., must all be considered, quantified, and explained in developing a solid and credible forecast.  For example, the current mantra seems to be that social media networks will generate whatever “buzz” and sales a company needs.  However, this argument seldom has a solid explanation regarding how, what, when, and where such meteoric growth in customer awareness and purchasing will occur.

Avoiding the Pitfalls of Poor Forecasting

So how does one develop a good forecast with little market data, no history and a brand new product or service?  My approach — developed over many years of experience — is to utilize a variety of time-tested tools, and then to develop a most likely scenario based on the best information available.

Before starting this process, you must learn to avoid what is generally called “confirmation bias.”  Here’s where things can easily go wrong in most forecasts and market testing.  It’s human nature:  we usually test to prove our hunches right.  We start our forecasting with a favored option and try to build a case around it.  We may deny this tendency, but it is all too common among hopeful entrepreneurs.  The result is that the less-favored alternatives usually get short shrift — and these are often the more probable scenarios.  The more that there is at stake in the test, the more susceptible we are to Confirmation Bias.

Never state that you have no competition. Such a statement means one of two things to investors: either your business sucks, or you haven’t done your homework and you don’t know your business. Even the most amazing disruptive game-changing plans have competition, if not now, then tomorrow.

Once you have addressed the pitfalls of your confirmation bias, it’s time to take an honest look at your market or markets.  Today it is easy to generate “market data” — it’s a keystroke away on the internet.  There is abundant market and census information on total markets, such as how many pizza parlors, on line apparel retailers, or fitness centers exist in the country, and, sometimes, even in a state or local area.  However such information is not always current or accurate, and even the best of market data can be too broad or generalized for your plan, which may target a narrow segment or area of a market or location.

Some suggestions for mediating this dilemma are:

  • Define your market in terms of products, demographics, region, prices, distribution, and growth, etc.
  • Use surrogates like sales per sq. foot, other web sites or other services to develop parameters on your business. For example here is a simple chart for one person providing personal services by hours and rates

Other key elements of realistic market assessments pertaining to your forecasts include:

  • Why are you different?
  • What is your history or comparisons with competitors?
  • What is the market capacity and trending?
  • How will marketing generate your sales?
  • How will competition react to your initiatives?
  • Who might enter the market once you appear on the scene?

A final word about Market Assumptions

The first stage in creating the sales forecast is to estimate Market Demand.  Market Demand for a product is the total volume that would be bought by a defined customer group, in a defined geographical area, in a defined time period, in a given marketing environment.

Once you have estimated the total market demand, you can estimate your company’s share of that demand:

Company Demand = Market Demand X Company’s Market Share

The final element in forecasting market demand is to look at future demand for your products or services.  Future demand is based on the growth of sales in the industry and changes in the market share.

Sales Forecasting

Accurately predicting future sales is perhaps the most difficult aspect of the forecasting process.  This is based on what management expects to happen to the company’s market share, coupled with the estimated demand for the company’s products or services at the proposed price points.

Specific sales forecasts can be based on a integrating a variety of information and efforts:

  • Actual customer buying results and attitudes.  For example how do price changes , or promotions affect sales on a long and term basis?
  • Marketing and brand efforts and long term impact.
  • Competitive and distribution changes.  For example retail store sales are growing about 1 % a year and internet sales 15-20%.
  • What customers have done in the past in the market.
  • Time series trends for the market and company.
  • Seasonal or cyclical factors.  Sales are affected by swings in general economic activity (e.g. increases in the disposable income of consumers may lead to increase in sales for products in a particular industry).  Seasonal and cyclical factors occur in a regular pattern;
  • Erratic events; these include strikes, fashion fads, war scares, and other disturbances to the market which need to be isolated from past sales data in order to be able to identify the more normal pattern of sales.

Conclusion

“Investors aren’t looking for specific revenue numbers or profit margin benchmarks. What they are looking for is a business strategy that makes good, practical sense. Angels would rather invest in a business with a reasonable shot of generating $20 million in sustainable revenues than the $100 million fantasy.”

Seasoned Angel Investor

While forecasting is never a precise science, there are numerous causes and efforts that can be used to mitigate the pitfalls and optimize the probability that your forecasting will support — not erode — your chances for successful financing:

  • Recognize that the playing field is never level.  For example, owners of competing businesses may have more contacts in your industry, they may have access to more capital (deeper pockets), and they may even have a stronger support network of family, friends and investors
  • Understand the various factors in your business and market to produce better quality, more accurate, and credible forecasts that support your plans to succeed and grow
  • Have a clear marketing strategy.  You never know where, when, or how a new prospect is going to hear of your business.  If you have a mix of messages out there, the prospects will have an unclear expectation of what your business has to offer.  Your company must present a consistent, clear message on all fronts
  • Understand pricing and pricing dynamics.  Lower prices don’t necessarily mean more customers.  Many customers are willing to buy more expensive items because of the greater quality or the added convenience.  However many presumed benefits are neither real or relevant, and some intangible benefits are not easily communicated
  • Clarify the purpose of your company beyond just making money.  This will set the stage for attracting like-minded investors, staff, and strategic partners
  • Set specific, measurable, accountable, realistic, and time specific goals to ensure continual progress.
  • Even if you have the latest, greatest, never-been-done-before approach to something, don’t assume that you have no competition.  Competition is more than just the direct, obvious competitors.  Competition is also all the available alternatives
  • If you go in expecting to be rich overnight, you may become discouraged early on and give up your dream prematurely.  Success takes time, perseverance, and a little bit of luck.  Give your business time to grow.

Business Presentation and Image

Business Presentation and Image

Introduction

Business Presentation and Image

You only have one chance to make a first impression.

An investor received a knock on his office door and in walked a woman dressed from head to toe as an avocado.

She reached in her bag and handed him a thick business plan about guess what?

Avocados!

The investor shook his head in a “No Way!” gesture, and as he let the woman out, said to her, “Regardless of whether I was interested in what you had to say, I’m not about to do a deal with anyone dressed like an avocado and a plan as thick as a phone book.”

Outrageous as this anecdote may seem, such stories abound in the world of investment and business.  Many entrepreneurs fail to realize that a critical factor in startup success is your image and presentation.

And fewer still understand the need for SIMPLICITY.

The Good News?

Creating a professional business presentation and image need not be expensive or complex.

The (potentially) Bad News?

Creating a simple, clear business presentation and image can be very challenging.

Consider the following facts:

  • “90% of most impressions are made in the first 30 seconds of contact, and they are not based on the substance of the communication”
  • I repeat:  “90% of most impressions are made in the first 30 seconds of a meeting and they are not based on the substance of the communication”
  • Most people will only spend 2-4 minutes on your website, and the top three places on most Google searches account for 80-90% of the clicks
  • Our lives and careers are over-saturated with digital, video, audio, and print content.  About the only communication media that are declining are the US mail, catalogues, and newspapers.

The challenges of presenting the right image and making impactful business presentations are crucial to resolve if you want your business to rise above the “chatter.”

If you think I am on to something, read on.

General Considerations

It’s Not About Content

In early business presentations, we frequently become preoccupied with the format and content and we neglect the most important consideration — our Goal and Purpose.

Are we selling something, developing a relationship, impressing the audience, or something else?  What is the “take-away,” the “call-to-action” that is actually desired from the audience?

  • To buy your product?
  • To sign a contract?
  • To invest?

For many entrepreneurs, it seems that the “Goal” is:

  • To bore the audience
  • To put them to sleep, and
  • To insure that there won’t be a next meeting.

How to Manage Inevitable Distractions

Let’s say you are presenting to a group and there is someone in the audience who is creating a distraction, or getting you off track with irrelevant questions. You need to remember that it’s YOUR job to manage the business presentation and not allow such distractions to derail you.

The Curse of “Content” — Why “KISS” is the Key

business presentation KISSA few weeks ago, a client and I were discussing how to improve a business presentation because he thought the material was over some of the participants’ head.  He insisted on including as much content as possible.  He failed to realize that too much information can lead to failure.

The simple rule:  “KISS” applies to almost every business presentation.

One expert uses this rule:

“Create your presentation, then cut it in half… then cut it in half again!”

How Well Do You Really Know Your Audience?

A sure way to avoid the mistake of over-complicating your business presentation is to make sure you understand your audience and their key interests.

Before you develop your business presentation, ask the following questions:

  • What is the most important problem my product or service can solve for them?
  • How is my product or service superior to others they may be considering?
  • How much time do they have for my business presentation?
  • Are my business presentation materials engaging and clear?

If you don’t know the answers to these and related questions, don’t be afraid to ask.  Use their answers to help decide which benefits to play up in your message, and make it as informative as possible.

Your Image–Remember the Avocado Woman

Another key element of presenting has to do with the image you project to your audience.  No matter what the “Avocado Woman” had in her business plan, she failed to create a positive and credible image to her audience.

Here’s where researching your audience and their culture comes in.  If you are presenting to a “formal” business culture you may want to wear a suit and tie.  A less formal company culture might mean “business casual”.  The key is for your audience to feel comfortable.

Business Presentation Goes Beyond the Meeting

Another factor influencing effective presentations has to do with the type, level and timing of follow up.  Emails, calls, reminders, etc. are often necessary to improve the chances that the desired call-to-action actually happens.  Make sure that you understand your audience’s needs for such follow up, and tailor the type, level, and frequency accordingly.

Don’t Rely on Digital Communications Only

These days we can tend to focus too much on the communication content and not the process of the communication.

Quite simply, we are not always aware of the need for more one-on-one communication, and at times for even informal exchange with our audience as the process evolves.

Such a personal touch will often distinguish you and your company from others.  It can also help build understanding and trust, which are often missing from the mass of impersonal emails, auto-responders, spam, pop-up presentations, reports and other “canned” forms of content that dominate much of our lives these days.

Emphasize the Positive—Give them a Glass That’s Half Full

There is no substitute for making your business presentation a “WIN-WIN” with an emphasis upon solutions, problem-solving, and the benefits of doing business with your company.

A win-win environment helps develop support, consensus and shared goals.

Keep your presentation positive, up-beat, and don’t speak poorly of either your competition or your audience’s competitors.

Be sure to respect your audience’s expertise, experience and opinions — this will help insure that you are taken seriously and that you are perceived as being open to new ideas.

Specific Considerations

  • Make sure your information is relevant to your audience’s needs and interests.
  • Don’t confuse your business presentation with superfluous information.  The only thing your audience cares about is whether or not your company can meet their needs.
  • Make sure all of your business presentation materials are consistent and professional.
  • Give your name, your company name and try to learn the names and roles of those in your audience.  Put a signature on your emails with name, website, e-mail address, and phone number.
  • Anticipate Technical Issues.  Frequently, events are scheduled in tight time slots to justify the expense of taking people away from work.  Details such as the date, time, room, equipment, and temperature control can make a big difference.
  • Don’t sabotage yourself.  Many of the errors I have hi-lighted in this article can be illustrated in a “bad PowerPoint presentation.”  There is nothing worse for an audience than having the lights go out and being subjected to a long, irrelevant PowerPoint presentation.  If this is your plan, you could save both you and your audience time and effort by cancelling the meeting in advance.
  • Take away the risk.  Once you’ve built up the desire to have what you sell, you could still lose.  Repeat the confidence in the product, yourself, and the company.  If possible offer guarantees, samples and assistance with any problems.
  • Incorporate informality humor and stories into your presentation.  Vary tone, detail and emotion to create interest and avoid boredom.
  • Practice appropriate business etiquette.  Verbal presentation success is really a function of do’s and don’ts.  The most important of these is proper behavior, dress, and courtesy.  Learn to say “How are you?” “Please,” and “Thank you.”  Look at people when you are speaking with them.  Do not interrupt conversations to answer your phones or check text messages.
  • Use visual aids, gestures, emotion, and movement to enhance your presentation.  Use headlines and graphics your audience cares about
  • Close with a Call to Action. Tell your audience what you want them to do after seeing your business presentation.  Don’t just assume your audience will look for your phone number or email address and contact you.  If you don’t tell them what action to take, they may take the wrong one, including possibly calling another merchant or service provider instead of you.
  • Make it easy for your audience to respond.  Be sure your name, your business name, your website, email address, and phone number are easily found.  I can’t believe how many websites, e-mails, and presentations omit key contact information.

In Summary…

In today’s business environment, we are inundated with unprecedented levels of input in a myriad of formats.  LESS IS MORE.

Your audience will first focus on how to filter OUT information—not how to take it in.

Your challenge is to engage your audience so they will want to take your information IN.

I was going to write another 16 paragraphs about this subject, but instead…  I decided to “KISS IT”!

Market Research Overview

market researchMarket Research Overview

Introduction

One of the first questions a would-be investor or lender wants answered by the authors of a business plan is:

How much do you really know about your Market?

And no wonder they ask.  If you — as an entrepreneur seeking funding to launch your enterprise — don’t know your market very well:

  • How can you be expected to develop and position your products or services for success?
  • How can you know who your target customers or clients are?
  • How can you develop an effective strategy for dealing with your competitors, both present and future?

As enamored as we may be of our own discoveries, products and/or services, it is ultimately the market that will decide their value.  And investors know this all too well.

Market Research — An Essential Key to a Solid Business Plan

Fortunately, this is where market research — and your abilities as a market researcher — can play a valuable role to help insure that your business plan reflects solid thought about the market you propose to enter, the customers or clients you hope to attract, and the strategy you have developed to be and remain competitive.

To many entrepreneurs, market research is perceived as a mystery that we assume relies upon sophisticated surveys, monitoring of our media, and forecasting outcomes ranging from purchasing habits to political races.  Many times, decisions made on the basis of poor market research fail, due in large part to poor design and poor quality execution of the research itself.

Such failures of market research don’t have to be the norm — in fact are very avoidable.  For example, one of the most important market research resources you have involves direct feedback from your current customers or (in the case of a pure startup) your prospective customers.  Notice I said your “potential and current customers,” and not your mother, friends, or enemies who are usually prejudiced one way or the other.  Simple surveys of current or prospective customers and clients — well-designed and conducted — can yield a great deal of relevant information about your products and services, your target customers, and your competition.  In the pages ahead, I will share with you some of the important aspects and resources you may use to insure that your business plan is grounded in solid market research.

Keys to Effective Market Research

Good market research answers many important questions about your business, your target market, your customers and clients, and your strategy for effective market penetration.  Among the key questions regarding your market research are:

  • What information do you need?
  • What is the best way to gather the information you need?  and
  • How will you analyze and follow up on the data generated?

The results of market research become the basis of your plan to move forward with your business in a manner that best assures your success (and the success of your funding partners).  You need adequate market research to provide you direction about where you should be going with your business in the marketplace. 

One day, Alice came to a fork in the road and saw a Cheshire cat in a tree.  “Which road do I take?” she asked.  “Where do you want to go?” was his response.  “I don’t know,” Alice answered.  “Then,” said the cat, “it doesn’t matter.”

Without such information, you’ll be like Alice in Wonderland, when she “came to a fork in the road,” only to find (from the Cheshire cat) that without knowing which path to pursue, there is little value in proceeding.

Your Target Customer or Client

One of the frustrating aspects of market research is estimating the market and narrowing it down.  For example:

  • There are about 315 million people in the U.S. split approximately equal between males and females, and 30-50% of whom are too poor to buy many products or services. Approximately 40% of the U.S. population are between the prime purchasing ages of 25-54. Thus, before one analyzes geography, lifestyles, ethnic etc., the total U.S. Market for many products and services that are for one gender or the other is really about only 30-40 million consumers. You can see how rapidly your target customers and clients can be reduced by simply looking at the most basic of demographics.
  • Many market studies stop at this simple level of analysis, and they frequently fail to conduct further detailed segmentation, citing millions of potential customers in what are actually very narrow market segments. In defining target consumers accurately and realistically one must consider at least the following:
    1. Age
    2. Geography
    3. Income & Lifestyle
    4. Ethnic background
    5. Education, etc.
market research niches

The transportation industry has many sectors and niches.

Your Industry, Sector, and Niche

Beyond identifying your target consumer market, a second important aspects you need to research are the market and competition for your product or service.  It is not sufficient to identify the general industry for your products or services, but also your sector of that industry, and (if appropriate) your niche within that particular sector.  For example, your business plan might indicate that you are in the “communications” industry, but fail to focus on the “telecommunications” sector, and the “smart phone” niche.

Your Competition

While many entrepreneurs insist there is no competition for their product or service, this attitude is almost always naïve.  The likely reality is that companies are either already meeting the needs of your product or service, or they soon will be.  It is essential that you take a long and honest look at your competitors, and not underestimate them.  For starters search Google for the industry, product or service you are proposing to bring to market and you will see pages of links, often representing millions of websites.  Don’t be discouraged by this, but use it to extract information and develop a comparison of competitors with respect to critical variables such as:

  • Volume benefits

    Analyzing competition is a key to good market positioning. Don’t underestimate your competitors.

  • Performance
  • Quality price
  • Convenience
  • Selection
  • Availability
  • Brand identity
  • Service after the sale
  • Presentation, and
  • Integrity

Is Your Market Growing, Shrinking or Stagnant?

Telephone handset sales chartA third aspect you need to research concerns the characteristics of the market in terms of its trending.  If your market is growing, provide such information in your plan and cite good sources.  How much is it growing in terms of units, dollars, regions, and profit?  If your marketing is either stagnant or shrinking, source that information, and explain why you believe your product or service can succeed in such an environment.

Other questions that logically arise during the course of market research deal with a wide range of factors that influence both the market and the value your prospective customers and clients might place in your product or service.  A good starting list of these questions include:

  • Can the market be segmented, and if so how?
  • What types of people buy this product/service, and why?
  • Does the product/service have limited appeal based on geography or other factors?
  • What do potential or existing customers like about my competitor’s products/services?
  • What makes my product/service unique relative to others in the marketplace?
  • What are current buyers paying for comparable products/services?
  • What factors are most important to buyers when selecting a product/service: price, quality, delivery time, etc.?

With these estimates in hand it usually possible to develop a preliminary market estimate and market share goals. Remember that when you focus on your market this is a process both to establish potential forecasts and identify the variables that might influence them.

How Will You Gather Data?

market research competition

Analyzing competition is a key to good market positioning. Don’t underestimate your competitors.

The good news about data acquisition for your market research is that there are many resources available and most of them are free.  While many researchers advocate developing a specific formal plan for their market research, I frequently find a more ad hoc process can be extremely productive, especially in the early stages.  The easiest way to execute this is simply to spend a few hours in a good local business library or on the internet.  You can frequently find free market data, competitive analyses and even marketing or product trends.  These efforts can provide a great deal of valuable information rapidly as well as provide guidance and parameter for further research.  Remember, the more credible your market research, the more credible your plan, and the more likely you will be funded for eventual growth and success.

Other potentially valuable sources of market research information include government databases, industry associations, and reputable media.  Some key suggestions for research resources include:

Indirect resources from others:

Free market research surveys:

Product Assessment

  • Visit trade shows, retail stores and on line sites like amazon and eBay
  • Consider developing samples and testing
  • Develop surveys of opinions, needs and evaluations though individual and focus group exchanges

What do you do with the Information?

In compiling, analyzing and summarizing information there are some key guidelines to consider:

  • Much market research has an in-built positive bias that tries to support its position.  If we are not careful, we can go in with a favored option and try to build a case for it.  We may deny it, but we all do it, even if unconsciously.  This can mean that a less favored alternative might get short shrift, resulting in a less-than objective assessment of the market, competition and target customer or client.  And, it’s often in one of these less favorable-seeming alternatives that an optimal strategy for success may be revealed.  It’s good to acknowledge up-front that the more there is at stake in our research, the more susceptible we are to Confirmation Bias.
  • We can lose focus and research the wrong information, wrong market or wrong data.  Ask yourself:  do you have the right geography, the right consumers and have you differentiated actual potential buyers and people’s opinions regarding what they might buy?
  • Another key question:  Have you analyzed the data correctly?  Is the body of data you have collected accurate, is your sampling reasonable, and do your findings reflect the data?

Conclusion

In spite of the challenges to conducting good market research, there are many key benefits that will strengthen your business plan, improve your chances of funding, and ultimately enhance your prospects for long-term success. These benefits include:

  • Setting realistic goals, requirements, and needs that will keep the process focused and targeted
  • Being involved and summarizing the process will ensure greater understanding and rationalization of the effort
  • The process required will focus your attention on the market and its potential, on your competition , and on development of the best strategy for your business to succeed
  • The final product of good market research involves other quantitative and subjective data which need to be considered in the analysis
  • Consideration of distribution, pricing, service and product will combine to result in a solid market research plan and subsequent strategy, and
  • Remaining objective means avoiding the common mistake of tossing the results aside just because they did not support the answers you wanted to see.

The bottom line is that you have to “do your homework” in order to have any chance of success.  What you can expect from market research includes an assessment of the potential market for your idea, identification of potential competition and competing products or businesses, perhaps some insight into barriers regarding introduction of your idea into the marketplace, and you may even find additional markets you never considered before.  You must also be prepared that the market research results may “NOT PROVIDE THE ANSWER YOU WERE LOOKING FOR”.

Branding and Differentiation

brandingBranding and Differentiation

Introduction

One of the greatest challenges — and opportunities — faced by startup companies has to do with building the brand for their product or service, and distinguishing them from the host of established and emerging competitors.  Many entrepreneurs do not fully appreciate the importance and value of a great branding and differentiation strategy.  Instead, they believe — to paraphrase Ralph Waldo Emerson in the 19th century — “if you build a better mousetrap, the world will beat a path to your door.”  This, of course, is seldom the case, and the history of startup ventures is filled with examples of good — sometimes great — businesses that failed for lack of a solid strategy to brand and differentiate themselves. According to best-selling author Seth Godin: “A brand is the set of expectations, memories, stories, and relationships that, taken together, account for a consumer’s decision to choose one product or service over another.  If the consumer (whether it’s a business, a buyer, a voter, or a donor) doesn’t pay a premium, make a selection, or spread the word, then no brand value exists for that consumer.” The important aspects of Godin’s definition of branding are that it involves the totality of your offerings, and the only things that count are your customers’ perceptions.  Thus, branding and differentiation involve creating at least the following elements:

  • An image that conveys your vision, mission, and distinctiveness
  • The sense of quality, convenience, and value you offer
  • The “packaging” and delivery of your products and/or services
  • Your approach to marketing, including traditional and social media/web marketing
  • Your distribution and service after the sale
  • Education about features, advantages, and benefits, and
  • Tailoring your branding to specific market niches.
Seth Godin, Author and Branding Thought Leader

Seth Godin, Author and
Branding Thought Leader

The purpose of these efforts is to gain customer acceptance of your products or services and perceive their value, thereby encouraging repeat purchases and avoiding making price the main reason to buy.  Entrepreneurs who make this mistake run the risk of always being vulnerable to the competition and chasing each other to the bottom of the market.

Differentiation—The Entrepreneur’s Model

Most of us understand the value of differentiating our products or services, and we often hear stories about how old and well-established firms have achieved these critical goals.  But, comparisons of such companies with startups can lead to confusion, due in large part to the fact that the likes of Apple, Coca Cola, Google, Nike, Whole Foods, BMW, etc. have been around for decades, have huge marketing budgets, are often the leaders in their industries, and really have created something special over years of product development and market research. I believe most of us in the entrepreneurial and startup world face very different challenges.  This belief is based upon counseling almost 1,500 startups over the years and witnessing first-hand how their issues are far different than those of established companies.  Examples of the types of companies I have counseled include restaurants, T-shirt companies, fitness centers, yoga studios, apparel companies, internet marketing companies, and various service companies.  For example, I live in NY, and it seems at times that there are two pizza parlors, two nail studios, a coffee shop, and two bars or restaurants on every block.  To the casual observer, these businesses may all seem quite similar in their respective business sectors.  However, this is not always the case, and successful branding and differentiation can make all of the difference for small enterprises such as these. There is a major limitation of size that can provide opportunities.  In general size comes inertia and the inability to rapidly move into high-value niche markets.  Designer Jeans, Spanks, and designer water are examples of start-ups finding niches and capitalizing on them. That’s also why big companies like to buy small ones — they have the ability to seize changes in market trends, patterns, tastes, etc.  They also have the ability to implement new technologies rapidly. To demonstrate this, I suggest the following exercise:

good branding and differentiation

Learning what people value is essential to good branding and differentiation.

Informally survey customers, managers and workers about their business or product and why they find one different, better or preferable.  I would predict that in general you will find answers you may never have considered.  Some of the responses you receive may simply be subjective perceptions, but others may be real differences regarding what customers think is important about the brand and distinction of one business versus a competitor.  For example, one unexpected response I received was that some customers think only dirty pizza parlors make “real” pizza. Such attitudes from real world customers must be considered in developing your branding and differentiation strategy.  I generally find that start-up clients are frequently excellent at describing how they perceive they are different, focusing more on “features” than “benefits.”  For example the best section of many plans is the description of the product or service, the expertise of the company, and how great they are.  In contrast, however, the weakest sections of the plans are frequently the analysis of competition, market research, marketing plans, and distribution plans.  This lack of objectivity can lead to a weak and ineffective branding of a company’s products or services.

Three Keys to Branding and Differentiation

There are, however, three key areas where entrepreneurs can focus on branding and differentiation in order to avoid common pitfalls and achieve greater success:

  • How are your company and its products or services truly different?
  • Do enough customers care about these differences?
  • How can you most effectively communicate your differences within budget?

How Are You Different?

Analytic Matrix

Analytic Matrix

This table provides an analytic matrix of your company’s products or services and your competition.  Filling out a competitive comparison such as this forces you to evaluate what is important, how you rate, who are your competitors and how you compare with them in the eyes, minds, hearts and pocketbooks of customers.

Do Enough Customers Care?

Does the consumer truly understand or care about your differentiation and how do you know this?  Frequently we think we have something special and the consumer either doesn’t know about it, doesn’t understand or doesn’t care.

Your customers determine the value of your products—not you!

For example, I love everything about Costco and I don’t care about the large packages, lack of service, lack of bags, and limited selection.  Costco carries what I want, and it’s less expensive than the competition.  Besides, I find products there that are fun, and one more thing — Costco has great hot dogs; the fact that they sell over 109 million hot dogs every year proves I am not alone. In contrast, I drink wine but I have no interest whatsoever in fine wines.  No matter how much you try to convince me of the value of a fine wine over what I normally drink, I can’t tell the difference between a ten dollar bottle and one that retails for $100 bottle. These examples illustrate two critical concepts about differentiation:

  • Can the customer actually tell about differences?
  • What determines quality?

While many women will crave expensive new shoes or purses, many men won’t buy new shoes until the rain comes through the holes in the soles (except their basketball shoes).  Clearly, women tend to identify differences in shoes more than (most) men. For years marketers spent millions teaching consumers that Coke is different than Pepsi, or that one brand of Vodka is actually superior to another.  In the final analysis, the customer will be the final judge of your product’s value.  The sooner you learn this principle — and the more you build it into your branding and differentiation strategy — the more successful and profitable your company will be.

Your value proposition needs to be aligned with your customers, or they will buy from the competition.

Let’s explore the question of “What determines quality?”  Many of my clients will talk about how their products are superior to the competition because they are made in the U.S., because they are made from real wood or cotton, are handmade, etc.  However, a certain segment of their customer base might not value these attributes as much as the client thinks.  For example, some customers may value synthetic over natural products, reasoning they will last longer, or they may value machine made over handmade believing that machine made products can be more precise and consistent than handmade. Some customers may believe that products made overseas can be made more affordably with equivalent if not superior quality control procedures and more detail than products made in the U.S.  Understanding how your company’s values and mission are aligned or mis-aligned with potential customers is a key to intelligent branding and competitive positioning.

How to Best Communicate Your Competitive Differences

value in brandingAssuming there are differences between your products and your competition — and assuming that a significant percentage of your customer demographic cares about such differences — how do you best communicate these differences, especially without big marketing budgets and years of reputation from building your brand? For new entries into the markets for cars, phones, beer, detergent, cakes, milk, etc., it is nearly impossible to communicate meaningful differences to the public.  However, there are exceptions, especially when a new market category is created.  Two inspirational examples with regards to such marketing and differentiation are bottled water and pizza crusts.  Who would believe that someone could market water for a dollar or more when water is essentially free?  And who would believe that anyone would buy only the crust of a pizza?  The lesson here is that if you are hoping to launch a product into a crowded and existing category, you’ll have to work much harder and smarter to penetrate through the “noise” from the competition.  On the other hand, if your product represents a truly new category with virtually no competition (yet!) then your branding and positioning need to focus more on the inherent benefits of the product to your customer.  Boboli’s motto says it all…”Only YOU can top Boboli!”  Key factors that have proven to attract customers to products include:

  • Image
  • Culture
  • Packaging, and
  • Customer service.

You know the consistency of food at McDonald’s, the service of a Nordstrom’s, the appearance of a favorite neighborhood store or simply the warmth of a “Hello! How are you?”  Many of these factors evolve from the culture of the organization which is based on excellence and respect.

Conclusion

Service, image and culture are frequently the biggest opportunities and frequently least expensive opportunities for small companies to develop a brand and differentiate themselves. Some suggestions:

  • Focus on your target market, segment and your ideal customer
  • Market the real product your customer wants to buy (the same customer may want the prestige of a designer purse name and then buy private labels at the grocery store to save money)
  • Be polite, and listen, then act, on what you have learned
  • Become a trusted resource to your prospects by providing information that will help them make a good choice
  • Support your efforts with a web site, social media, brochures, etc. (I can’t believe how many small businesses don’t have professional marketing collateral )
  • Build an email list and send informative mailings on a regular basis
  • Keep in touch with potential customers and existing customers a month or 6 months from now

In summary, branding and differentiation are two of the key areas required to bring even the greatest new products and services to market.  These two strategies are linked, and are primarily a function of ensuring that your product or service meets the needs of your consumer, by offering value as defined by that customer, not by you. As one expert said “Yup…we all know the adage….features tell, benefits sell.”  If this is true, why do so many entrepreneurs still speak in terms of the features of their product or service and not its benefits? Your prospective customers don’t care what your product or service does… they only care about what it does for THEM!