Monthly Archives: March 2016

How to Build a Company: Part 3 – Market Research

Thus far we have reviewed the process of creating a Business Entity Type (e.g. LLC, LLP, INC) and the formulation of the Business Plan.  Now we need to look a bit closer at Market Research.

What is Market Research?

Market research is the process of gathering relevant data to help solve marketing challenges that a business will most likely face–an integral part of the business planning process. In fact, strategies such as market segmentation (identifying specific groups within a market) and product differentiation (creating an identity for a product or service that separates it from those of the competitors) are impossible to develop without market research.

The key process behind market research is to get to know your customer better than they know themselves.  The more through the research the more information one has to develop a new product and grow their business.  The smaller the niche the easier it is to develop a killer business model.  When we started Orbitz, there were only two other businesses doing meaningful travel sales online (Expedia and Travelocity).  We changed the online travel business model by making money by volume vs sales price through our unbiased matrix display showing the lowest fairs first.  Orbitz didn’t make a percentage of ticket sales price (e.g. 10% of a $1000 fare) like our competitors.  We established our revenue model around a flat fee per ticket sold (~$6 per ticket) requiring us to move significant volume and capture marketshare to be profitable.  It was easy to get new customers when our pricing was less than anyone else online!  The market void we discovered through our Market Research helped us build a profitable business that customers loved.

Orbitz Matrix Display

Orbitz Matrix Display

What is the Market Research Process?

Market research basically involves gathering two types of data:

  • Primary information. This is research you compile yourself or hire someone to gather for you.
  • Secondary information. This type of research is already compiled and organized for you. Examples of secondary information include reports and studies by government agencies, trade associations or other businesses within your industry. Most of the research you gather will most likely be secondary.

When conducting primary research, you can gather two basic types of information: exploratory or specific. Exploratory research is open-ended, helps you define a specific problem, and usually involves detailed, unstructured interviews in which lengthy answers are solicited from a small group of respondents. Specific research, on the other hand, is precise in scope and is used to solve a problem that exploratory research has identified. Interviews are structured and formal in approach. Of the two, specific research is the more expensive.

One of the most effective forms of marketing research is the personal interview. They can be either of these types:

  • A group survey. Used mostly by big business, group interviews or focus groups are useful brainstorming tools for getting information on product ideas, buying preferences, and purchasing decisions among certain populations.
    • NOTE: Survey Monkey is a tool very often used to quickly reach and gather results.
  • The in-depth interview. These one-on-one interviews are either focused or nondirective. Focused interviews are based on questions selected ahead of time, while nondirective interviews encourage respondents to address certain topics with minimal questioning.
    • NOTE: If a company is operating this is typically an easy step.  Contact existing customers and pay them something for their time.

Secondary research uses outside information assembled by government agencies, industry and trade associations, labor unions, media sources, chambers of commerce, and so on. It’s usually published in pamphlets, newsletters, trade publications, magazines, and newspapers. Secondary sources include the following:

  • Public sources. These are usually free, often offer a lot of good information, and include government departments, business departments of public libraries, and so on.
  • Commercial sources. These are valuable, but usually involve cost factors such as subscription and association fees. Commercial sources include research and trade associations, such as Dun & Bradstreet and Robert Morris & Associates, banks and other financial institutions, and publicly traded corporations.
  • Educational institutions. These are frequently overlooked as valuable information sources even though more research is conducted in colleges, universities, and technical institutes than virtually any sector of the business community.

Why do I need to Market Research?

The main issue I typically see is that an Entrepreneur who is developing a business believes they “Know” the customer and there is no need to research the market.  I see this mindset all of time.  What is surprising to me, however, is I actually see this problem in large well established firms more than startups.  I call this process designing “in-a-box.”  I have seen countless large firms invest millions into a program with zero market research then wonder why a product they launched failed. Here’s a link to an article that describes 22 epic product flops (http://www.businessinsider.com/biggest-product-failures-in-business-history-2014-7).  #22 is the ORBITZ drink!

That’s right, Orbitz was a soda before it was a travel website!  We bought the rights to ORBITZ from the bottling company, which is how we obtained our brandname.

The companies that are looking for help to get to know their customers better are the ones that tend to withstand the test of time.  Good examples of some proactive tech companies that spend the time and money to understand their customers and then utilize their research to create profitable products are Apple, Google, Facebook, Amazon, and LinkedIn.  Prominent businesses that I personally don’t believe do an effective job understanding their customers are Yahoo, Twitter, Groupon, and Travelport (Travel GDS provider: Worldspan, Apollo, Galileo).

Apple does Market Research?

Those that follow Apple may think it is strange that I would list them as a market research company when Steve Jobs famously said, “It isn’t the consumers’ job to know what they want. It’s hard for [consumers] to tell you what they want when they’ve never seen anything remotely like it.”  Although the statement is technically accurate for a company developing a never seen product before, it is only the version of the truth that Apple wants to disclose publicly.

Apple spends millions of dollars understanding their customers.  If you’ve ever visited an Apple Store, I suspect that most of you would agree it is an experience like no other retailer.  It is hard to put your finger on why.  Everything in an Apple Store form product placement to the LED lighting and Air Handlers has a purpose geared to engage their customers.  Their retail model is so pervasive that not only do customers come back frequently for the experience, they are willing to spend hours waiting in line to get their hands on a new product.  The Apple Store success is one that most retailers research throughly. We certainly did at Walgreens.  The Walgreens Flagship Stores were developed using concepts we discovered form researching Apple.

Apple operates in a highly competitive market and they do not share their secret sauce with the world.  During a lawsuit between Samsung and Apple in 2012, the Apple VP of Product and Marketing, Greg Joswiak, testified that they do Market Research and got into detail about their process.  Mr. Joswiak said, “they survey customers every month…”  Then went on to explain that “if a competitor were to find out what drives iPhone purchases – whether it be FaceTime, battery life, or Siri – it would serve as an unfair competitive edge to rival companies. Further, competitors, as it stands today, have to guess as to which demographics are most satisfied with Apple products.”  Apple petitioned the court to have the records sealed (read more).

Conclusion

Hopefully I have convinced you to do Market Research!  The process takes time, but it pays off more than one can imagine.  I have seen good market research transform a business.  We put orbitz on the map.  We took Walgreens who was an aging retailer and in a few years completely transformed the business.  Every business I have worked with that embarrasses Market Research and creatively implements solutions to the problems the unearth benefits form extraordinary success.  I trust you will have the same results if you put the time into researching your market and developing products that your customers want.

 

Chicago CIO and Entrepreneur. Started @Orbitz, @AssureFlight, Team ITG, YourPrivateLine and others. I Love technology, startups and meeting interesting people.
How to Build a Company: Part 2 - Business Planning

How to Build a Company: Part 2 – Business Planning

The next stage of this series is intended to expand on what I have found as key elements that need to be addressed to develop a winning business venture.

I suppose some may think this article series is somewhat out of order.  Arguably one should formulate a Business Strategy before actually forming a Company.  It is the chicken vs the egg scenario in my mind.  I believe planning on the business structure to be formed early in the development stage is equally important.  A business venture should never be started without a solid foundation and liability protections in place.  

Brainstorming the Business Concept

The first step in tackling a business idea is to throughly research the market, competitors, etc. before getting too far into the rabbit-hole wasting time and money.   We don’t want to start an expensive hobby.  The point of creating a business is to establish and entity that can actually make a profit, grow and evolve.  A good rule to start off with is simple…If a zillion people are already doing the same thing then chances are the market is saturated (read low profit margin); however, if no one is doing it there may not be a need for the product or service in the first place.  Identifying an area in demand that is in a niche market is generally the best way for a small business to quickly evolve.  Regardless of the concept, however, it is critical that the idea is throughly researched.

Business Planning Word CloudTo start a plan of any type one needs to brainstorm the idea and get their thoughts on paper.  I often use a word-cloud that has linked short phrases on a notepad with the core idea in the middle — building out the concept as new ideas come to mind.  I’ve found that this method is one of the most efficient ways to test and develop a potential business idea.

The Word Cloud step generally forces one to think about areas where they need more information — competitors, pricing models, sales strategy, etc.  I typically take one area at a time and gather as much information as I can.  The point is actually to try to kill the business idea at every step.  Look hard and be honest.  Is there money to be made?  Are there customers that will legitimately buy from you vs a competitor?  How much money will it really take to get started?  Have other businesses entered this market and failed?  Why?

After researching a sub-topic, I then create a word cloud with that topic in the center and build out on it.  Competitors, for example, can be expanded by adding sections:  Who are they? Who are their customers?  How long have they been in business?  Do they have good/bad reviews online?  Who are the principals?  Are you connected through LinkedIn or other sources to employees and/or customers?  What products do the sell?  What is their pricing model?  Are they making money?  How many customers do they have?  What are their product limitations?  etc., etc.  When all of the questions are reasonably answered (don’t spend months on this task) I move to the next section.

The word-cloud process can really help hone in on a working business model quickly.  If there are areas that will nuke the idea they are generally unearthed during this step fairly quickly.  It is much better to move onto another business idea than to try to start one that will very likely fail.  Statistics work against startups.  Something in the neighborhood of 90% of startups fail within 24 months.    If you want to be in the 10% that survive category, don’t spend time developing a business that your preliminary research predicts will not succeed!

Market Entry Planning

The next step in the process is to be honest with yourself and build a market entry strategy. This should not be a Masters Theseus, but it needs to be complete. You need to clearly identify your market, you need to accurately estimate what it will take to create the product, and you need to realistically project sales.  The best product in the world is useless if people don’t know it exists.  Conversely if you don’t understand the customer-base it is very easy to create a product that no one wants.

Market research is the core to building a workable Business Plan.  No one can sit in an office creating an idea on their own.  They need to talk to customers and sincerely invest time into developing their go-to-market products and services.  Getting a strong handle on what people will pay is equally as important.  Again, the point of starting a business is to make money.  You don’t want to sell a product for $100 that costs $99.75 to create.  This is an area where you have to be painfully honest with yourself.  It is very easy to only see the facts you want to see.

See How to Build a Company: Part 3 – Market Research for more details on Market Entry Planning

Business Plan

There is a ton of hype and confusing information on creating a business plan.  I personally don’t believe it should be a novel.  Regardless of what you create, any business that survives long-term morphs into something entirely different than the founders initial intent.  I’m sure the early IBM founders never thought they would be making Personal Computers one day…  I know those of us who started Orbitz never planned to be owned by Expedia  — our #1 competitor — ever!

The key elements of a business plan need to stay simple.  If you are looking for investors then a section about the principal owners is very important.  A new business typically doesn’t have a working product or revenues.  Investors are investing in and trusting the founders.  If you aren’t qualified by yourself, look for others that can join your team.  I personally, and I know of many others, will sit on an Advisory Board for minimal compensation up front until the company gets going.  Others may be looking for the next big thing and join your day-to-day management team for ownership interest vs a big paycheck.   The more experience you have on the management team the better the market and investors will valuate your business.

The Problem

The most important section of a plan is to clearly describe what problem you are solving.  Are you reducing costs, are you filling a niche market, are you solving a problem no one realizes exists (e.g. Apple iPod/iTunes)?  It is very important that this section is well thought through.  If you aren’t solving a problem, filling a void, saving money, improving efficiency, or doing something that has meat on the bone no one will buy your product.  Understanding the problem statement is also key to marketing and sales pitches.  It should be tested, tested and retested on friends, family social network, etc. to refine this section into something that anyone can understand.  This is not a book.  The entire concept should be easily understood in a few bullets.

The Solution

After the problem is defined then the solution section is where you describe how you will solve it.  What products will you offer?  What makes your products different than your competitors?  Who are your competitors?  Why would someone buy your product over theirs?  The more compelling the solution is the more likely you will secure investors and customers.  Similar to the Problem section, the solution needs to be tested.  Market research potential customers, call competitors customers, hire a market research firm, send out Surveys, etc. and nail down the solution!

Expanding on the solution concept, this isn’t a section where all of the worlds problems are solved.  Out of all of the areas you will likely discover through research, pick one or two solutions that will have the widest understanding and market appeal then zero in on those offerings only.  Too many offerings will dilute your brand and confuse the audience!

A/B Testing

Up until this point I have written a lot about developing a concept.  What I want to make clear in this post is that none of this can be done in a box.  Testing the market early and often is the key to being successful.  I believe a lot of Entrepreneurs wait too long to get offerings to the market. They try to create the “perfect” product and miss the boat entirely.  I like getting a product out as soon as it is stable to test the waters.  It is better to find out early an idea is not working than investing months or years into a product no one wants.

At Orbitz, we were one of the first travel companies to launch a mobile app.  It was exclusive to the Apple iOS platform and would only allow search (had to call an 800 number to book).  It was simple, but it clearly showed there was a demand for mobile search, which then provided us with data on what customers were looking for that helped us evolve the app and justify the expense to develop on the Android platform.  For example, we observed that travelers would actually get to a city and then search for a hotel vs. buying one early.  That was a surprise to all of us.  We “assumed” that people would use the app predominantly to find hotels before they traveled.   What travelers understood better than we did was that hotel rates drop the closer you get to a checkin time.  If a hotel property has a lot of available inventory they will release more rooms to the online travel sites and often dramatically drop their room-rates to fill the property.  Watching pricing change via our app was an unexpected benefit to our customers that clearly helped grow our revenues.

Business are Dynamic

Businesses that survive in this economy are dynamic and ever evolving.  The business planning process is cyclical.  Work through the steps, A/B test, refine the process and evolve every section of the plan accordingly.  The key is not to get stuck in a rut doing the same thing that although may be successful one day could be nonexistent the next.  Apple is a good company to research that follows this cycle.  They find a niche market, they build a killer product, they gain crazy market share, then they start working on the next big thing in secrecy while their competitors play catchup.  When Apple sees sales drops and competitors taking their marketshare they launch the next game-changing product.  Companies that are in a proactive position will always be more profitable long-term.

Expanding on the proactive vs reactive business is why I believe startup businesses are viable and can succeed in any economy.  It is a lot easier to change the direction of a small company vs a large one.  Employees are also very close to the market as well as the leadership in a small business.  In a large corporation it can take decades for them to evolve.  The older they are, the bigger they are, the more profitable they are, etc. stifles creativity in most big businesses.  Large company employees know what is going on in the world, but they don’t generally have a voice at the executive level that has the authority to make changes.  It is an accordion effect in a large business.  By the time the executives see a market shift other competitors are materially impacting their revenues. What generally happens is the large company does what they do and opens their checkbook acquiring a competitor vs building a product in-house.

I personally believe that the build a very solid product, get noticed by companies with deep pockets and be acquired is a very good long-term business exit strategy.  Having the right product that a large corporation would want can instantly make founders millionaires practically overnight.  Having a clear end-game strategy is something that should be incorporated into a business plan.  Not many businesses are built to last 100 years anymore.  Venture Capital Investors specifically look for clear exit strategies.  The better an exit strategy is defined the more likely you will get a VC’s attention.

 

Chicago CIO and Entrepreneur. Started @Orbitz, @AssureFlight, Team ITG, YourPrivateLine and others. I Love technology, startups and meeting interesting people.
How to Build a Company: Part 1 - Business Entity Types

How to Build a Company: Part 1 – Business Entity Types

I have started over a dozen businesses throughout my career.  Some successful and some “learning experiences.”  I am fortunate that more have succeeded than failed.  I try to pay it forward for the blessed life I have had by helping others learn from my mistakes and benefit from my experiences.  I coach young Entrepreneurs every chance I get.  I am proud to see many of them grow to create successful businesses of their own.

One of the questions I frequently get when talking to people thinking about starting a business is, “do I really need to form a Company?”  After answering yes with zero hesitation, I usually get the deer in the headlights look.  With that WHY? look in their eyes.  Establishing a company and dealing with lawyers, accountants, taxes, forms, annual board meetings, etc. isn’t generally the first thing that someone wants to do.  I thought I’d write a series on what forming a company actually means.  This first post in the series will discuss different business entity types.

Sole Proprietor and Partnerships

One of the key reasons for a new business venture to establish a formal entity out of the gate is to insulate the founder(s) form liability.  Anyone can start doing business as themselves, but that comes with significant risk that isn’t always understood.  As a Sole Proprietor, one who is in business for themselves, the principal owner is 100% at risk for everything they do.  If they have an employee that drops a box on a customer, the Owner/Sole Proprietor is personally on the hook for damages.  Every personal homeowner, auto, and umbrella policy I’ve seen has exceptions that exclude professional coverage.  In other words, if you are sued for doing work for a business you own…your personal insurance likely will not cover you.  Simply hauling boxes in your car to a clients house could result in no insurance and policy cancellation if you are in an accident (even one not your fault). Employees with a grievance can sue for a multitude of issues that could wipe out a Sole Proprietor’s personal assets even if the petitioner doesn’t win the case. 

NOTE: The personal liability issue also holds true for the small multi-level marketing businesses such as Amway, Mary Kay Cosmetics, Herbalife, etc. as well.  The people selling those products, recruiting others, etc. are typically operating as Sole Proprietors and could be personally held liable by an unhappy customer or recruit.  

A side note on personal liability and insurance is the emerging “shared economy” business models such as Uber and AirBNB.  When one starts driving for Uber, as an example, they are in the gray area of commercial vs individual operations.  Uber covers a driver and passenger liability and the vehicle (with restrictions) under their commercial policy as long as a paying passenger is in the car or the driver is on the way to pick up the passenger (e.g. they have accepted the trip on the Uber app).  However, when the driver is waiting for the next assignment they are doing so under their personal Insurance policy.  Uber will cover a loss with state minimum coverage in some cases if the main insurance doesn’t, but an accent regardless of what sage of a trip the driver is in often leads to policy cancellation putting them on the high-risk list.  

Geico and other carriers are starting to offer Hybrid personal/commercial policies for drivers that is significantly more expensive (read: Geico Ridesharing Insurance FAQs)

Accordingly, when one lists their home through services such as AirBNB, they turn their private residence into a rental.  Most personal homeowner polices do not cover commercial operations such as rentals.  When operating either of these business types the person and/or property/vehicle owners are considered Sole Proprietors or Partnerships when the asset is co-owned.

Similar to a Sole Proprietor business, a Partnership is a company formed by two or more people.  The only difference from a liability perspective is that all owners are equally liable for business damages and losses.  For example, one partner could file bankruptcy leaving the other 100% responsible for all debts and liabilities.  A Partnership is not an equal split either.  One partner could be silent with minimal direct interaction with daily operations while the other could be fully engaged, yet when liability is handed out the person who has the most assets ends up being responsible. The percentage of involvement in the business has zero effect on liability in a partnership.

Partnerships and LLP’s

Partnerships come in all shapes and sizes, but if a partnership is what one wants then we have to look no further than the legal profession.  Most Law firms are LLP’s, which stands for Limited Liability Partnership.  LLP’s are unique in that there are legal protections that cover the owners (states have different laws though). LLP’s are considered a General Partnership arrangement, which basically means that every partner has an equal say in how the business is ran.  It is management by committee.  When there is a stalemate then effectively the hold-out wins since decisions can only be acted on when voted in favor by the majority.  It tends to be best to form partnerships with an odd number (3, 5, 7, 9) of partners to prevent situations such as this from occurring.

Another potential downside with both partnerships and LLP’s is that you can’t simply leave the group.  In the case of a traditional Partnership the Business would have to be dissolved if a partner leaves or dies.   A partner cannot transfer or sale their portion in a traditional partnership.  An LLP is somewhat different in that partners can be added or removed, but a majority vote of the remaining members must pass to permit a change.  The remaining group may actually decide they do not like someone a partner is trying to sell their partnership to and deny the transaction.  Liabilities and profits are also equally spread over all partners.  If the business has a loss, the partners are responsible to settle the debts every year.  They are also personally liable for their portion of a business profits.

Limited Liability Company or LLC

A LLC is a form of a Incorporation (Inc.) I will discuss shortly.  LLC’s are similar to a partnership where individuals can buy into ownership, but the main difference is that there can be levels of shares that can equate to voting rights  One person in an LLC could own 51% of the shares and bring in others while maintaining control over the Business.  Similar to LLP’s, profits and losses are generally spread across the owners based on the percentage they own of the Business.  The prorated gains or losses are incorporated into each owners personal tax return.  Depending on the success of a company and the wealth of each individual owner, however, the income tax liability may be significant.  Individuals are generally taxed at a higher rate than a standard Corporation.

Another key advantage of forming an LLC is that some states, including Delaware, have laws that enable an LLC to be single entity formed.  This means an individual, or another Company type, can create a LLC without any additional owners.  A LLP requires at least two named partners.  The advantage of a single-entity LLC is that this enables the business to be formed, bank accounts opened, leases signed, etc. by the business in preparation to bring in investors, customers, and/or other owners after the company has started operations.  Individual Entrepreneurs can create a business on their own to incubate and then go to market with a working business, which will have more value than an idea on paper.

I’m not a tax attorney, so I highly recommend seeking professional advice when it comes to taxes.  It has been my experience that it is best to form an LLC and change its tax classification to a Corporation.  There are tax forms that need to be filed for this to happen…again talk to a tax professional…  When an LLC is taxed as a corporation it then files and pays its own taxes.  Moneys paid out to shareholders are paid in the form of dividends that are carried on the shareholders personal income tax returns.  In certain situations, however, a corporation classification for an LLC can lead to being double taxed — the business pays for its income then the owners are subsequently taxed on their dividends, etc.  Shareholders can get hit with capital gains if the company is successful and they sell their shares or the business as well.

Standard Corporations (a.k.a. Inc.)

Typically when we talk about a Company we are talking about the Incorporation or what we see in many business names as Inc.  An Inc. is an entity of its own in the eyes of the taxing systems and can have a virtually unlimited amount of shareholders, stock classifications, etc.  When we see US businesses being publicly traded they are generally an Inc.  Other country’s have similar classifications that go by different names.  In the UK, for example, they have a company definition as a PLC (Public Limited Company), which is basically the same as an Inc. in the states.

Inc’s have a big advantage when it comes to raising funds while maintaining control.  A business could release millions of shares while the principals continue to maintain control over the business.  Walgreens Alliance Boots (NASDAQ: WBA) is a good example.  Stefano Pessina is the primary investor that owns approximately 45% of the publicly traded Company.  He effectively has implicit control over the $130-Billion per year business with billions in assets.  Mr. Pessina along with any other other investor that owns 5.1% or more of the Company makes the final decision on what the Company will do.  Shareholder meetings, voting rights, etc. have no material impact on how the Company is operated.

Inc’s have many advantages, but as an entity in their own right traditional Company formations are fully tax burdened.  The Company is responsible for its own income taxes and any financial distributions to shareholders, investors, etc. are fully taxed.  I generally do not recommend starting an Inc. unless a Business is clearly on the IPO track bringing in multiple stages of funding or has plans to raise money through a significant number of investors (e.g. Penny Stock or GoFundMe investors that acquire ownership in a business).

Although it can be a complicated transition that could require back-filing of taxes, ownership structure may be changed in the future if necessary.  At Orbitz, for example, we started the company as DUNC, LLC in Delaware when the airlines (Delta, United, Northwest and Continental) were the sole owners of the Company.  After the LLC formation the airline owners subsequently added American Airlines to the LLC.  We later formed Orbitz Inc. when we were preparing to go public.

Summary

Hopefully I have helped bring clarity to this confusing topic.   The main decision can be boiled down to asking a couple of questions.  Are you creating a partnership that will have equal voting rights for everyone or do you want different levels of ownership?  In general terms, if you want everyone to be equal form an LLP.  If ownership levels are needed, the principal founder(s) want to maintain majority control, a single individual needs to start the initial business, etc. form an LLC.  However, if you expect to be brining in a large number of investors through penny stock sales and other means that would require SEC oversight then form an Inc.

Chicago CIO and Entrepreneur. Started @Orbitz, @AssureFlight, Team ITG, YourPrivateLine and others. I Love technology, startups and meeting interesting people.