Tales of Donuts & Demand
There are many challenges when starting up a business, problems which you will need to prioritize. Let’s begin with a sweet hypothetical: Due to the lack of donut shops in your area, there are 5,421 sugarholics who are not getting their daily dose and are clamoring for your services. This is a problem. If the business you’re creating is not solving some problem that currently exists in the marketplace, then you are going to have a hard time justifying the need for your business.
What problem are you solving?
It is critical for you to understand the issue in depth so you can articulate it to your sponsors, your staff, and your potential customers. Knowing the problem exists is one thing; understanding the problem in depth to find and perfect the proper solution is another.
We have kept It simple for illustrative purposes only. Even so, there are many different ways the problem can be solved. Installing a donut shop to satisfy the sugarholics is just one of them. Your competitors are not just other donut shops, but anyone else who is in the business of delivering a sweet product to the public, such as Starbucks, cupcake purveyors and other pastry shops. When you’re attempting to digest the problem, it’s extremely important to absorb it from all angles.
Why this problem has not been solved before? Who has tried and failed? Why did they fail? It is much more important to learn why someone failed than why he or she succeeded. If you cannot solve the equation that caused the previous problem-solvers to fail, then you will assuredly follow in their footsteps.
Identifying the real problem is sometimes much harder than it first appears. You see the lack of donut shops in the area, as well as those of poor quality. You think to yourself it appears to be an excellent opportunity. Now, look deeper to see why it hasn’t already been solved. Sometimes, it has nothing to do with the donut. Maybe the failure can be traced to the lousy coffee they were serving, or the lack of character or atmosphere in the store. Answers can come down to direct questions put to your potential customers, ask what drives them in their glorious pursuit of a divine sugar fix. Be creative, but get your answers.
What is your Solution to the Problem?
There are 29 million small businesses in the U.S., of which 15% turn over every year. That’s four million failed business every year. These were businesses that did not have the proper fixes or were trying to solve a problem that never really existed. Once you have identified a legitimate problem, the next step is to create and then refine your solution.
What is the Unique Value Proposition?
How does your sugar delivery system (the donut) differ from what the competition brings to the table? Are your donuts gourmet, soaked in bacon, or three times the normal size? Why should a sugar addict buy your product or service? How will you stand out? What makes your donut better? Is the difference substantial? Is it a difference that would be hard to replicate? The donut that is three times the normal size would be easy for the competition to reproduce, but if your donut was different due to a special secret flour blend that took years to perfect and you own the patent for it, then that would be the Unique Value Proposition.
What is your Unfair Advantage?
Your partner, the supreme donut baker, is a graduate of the prestigious Gordon Blew School for donuts, has 25 years making award winning donuts and recently won the “Most Unique Donut” prize at the county fair. That is what we call an Unfair Advantage. There is no one among your competitors who can come close. You know it, and will make sure the world knows it.
Who is your Target Audience?
Make sure you have asked all the right questions. Does the market consist of age 55 and above males and females who are desiring a taste of their youth, or it a much younger crowd craving something to eat after socializing all night? Who are you going to sell to? Who is going to be your ongoing buyer? Who will be your early adopter? Who will be your champion?
Beyond the age demographics, look at your target audience’s economic indicators. Can they afford your product? Does the area consist of health-food junkies who would never touch a donut, or is it suffering from economic blight, indicating the local area cannot afford the high-quality gourmet donuts you plan to offer? You will need to make sure you have all of the data to ensure accurate answers. It seems pretty simple, selling a donut. All one has to do is put up a sign and they will flock in. Right? Wrong! It’s almost a guaranteed way to fail. In today’s day and age, you need to be able to target your audience to make sure you get the right buyers into your store who are most apt to afford and enjoy your product. Your marketing and the success of your business depend on it. Knowing your audience allows your marketing department the opportunity to connect with them at a lower cost. Startups invariably shortchange the marketing budget while overspending on initial development. All dollars count during the startup phase. We will cover this in a later post.
What is the Market?
There are two numbers you want to get a handle on: market size or market potential, and your market share. The market size has many implications to your business. Are there 5,500, or 500 sugarholics in your market area? Of those, how many are current donut eaters, how many are chocoholics and how many prefer sugary cereals? These are referred to as market or customer segments and your penetration of each will be somewhat different. The potential market size varies by many factors. Do you service just the local neighborhood or are you planning to open more locations or franchise and go national?
Calculating this number, with its many variables, can be a difficult, but necessary chore. The easiest and best way is to contact the industry association that is involved in your business sector. They normally will have a wealth of information you can tap into. Some of the data you will have to extrapolate from various sources. There are numerous websites dedicated to demographics. For example, to find out how we arrived at the number of 5,421 sugarholics in your targeted neighborhood, we determined the population from the local chamber of commerce. We then applied the average percentage of sugarholics per capita that we acquired from the trade association, multiplied one by the other and viola, we now know how large the population of potential donut connoisseurs there are. Next, we took the average income and age numbers that we acquired from various demographic websites and plugged those into the equation to further refine the number of potential munchers down to who had the income level necessary to buy our product. Yes, there is work involved. Nobody is going to hand you the exact info you need unless you want to write a big check to compensate them for the time they put into research. Bottom line is, you need to know these numbers so you can plan your costs, predict your sales and your net returns.
It costs a lot less, in real dollars, to build out one location in a local neighborhood, but can you get the return on your donut patent? It is all part of the questioning necessary during the “planning to succeed” process. It is a number that needs to be investigated. Make sure all of your numbers can be backed up with real actionable data.
How will you reach your Target Audience?
Once you know who your market is and what size the market is, you will need to figure out how you will turn your market share into real customers. This is your marketing plan. It will tell you how you’re going to penetrate your market segments and what amount of your budget you can allot to it. You cannot price your product without knowing what it is going to cost you to acquire one customer and how much it will cost you to retain that customer. The cost are radically different for various methods. Door-to-door fliers cost for design, printing and delivery; direct mail costs for design, printing and postage; social media costs include learning effective best practices or hiring a professional. Know your costs, calculate your expenses and make sure you can afford the method you choose, and more importantly, make sure it will reach your target audience and be effective. How? Test it, test it and then test it some more. Do small quantities first, and then measure your results. Do A-B testing measuring the results of two methods against each other. Once you know what is working, then expand it to a larger scale.
What will be your marketing channels? Will you go door-to-door with fliers? Will you buy ads in the local church bulletin to offer Sunday service discounts (discount is a cost)? How will you let them know you are open for business and have what they want and crave? Email, social media, print, mail, these are all marketing channels. You found a problem. You created a solution. You have an audience that you can profit from. Now, you need to effectively plan to let them know all about your solution. It is good to experiment with many channels and find out what works and what doesn’t work. No matter how you determine to attack the problem, have a plan. Then have a backup plan. If something is not working, make sure you are nimble enough to be able to adjust, turn on a dime or in industry speak, pivot.
Now that you have your problem identified, your solution planned, and you know your market and target audience, what else is there to do other than moving forward?
In an upcoming blogpost, we will examine how to assemble your team and how to calculate your runway, how much money is this going to take, where to get it and what to do with it. We want to hear from you, too. Tell us what you want to know more about, what problems you are encountering, and how we can help. Contact us at info@StartupLegup.com.
About the author: Dick Teno is a serial entrepreneur with experience in a variety of businesses ranging from financial services to hospitality, and on the far end, a moose stud farm. Who knew? He is currently the CEO of AdSauce.co, an ad and social server for low to moderate traffic websites that is scheduled for a late August 2015 public debut. He can be reached at firstname.lastname@example.org