Once you’ve established what your new venture is going to do, you need to explain how you expect to make money by doing that. After insufficient capitalization, the single most common cause of failure in new businesses is probably cash flow problems, and a lot of those come down to not understanding where the money is coming from – which is to say, who will pay you for doing what you do, and how much? As I’ve noted previously in this space, the science of marketing is an intensely complicated discipline, based even more on statistical analysis than management is, and I don’t even pretend to understand all of it. Fortunately, all that really matters at this point are the fundamentals, and those are simple enough that even a management scientist like me can explain them…
First off, who are your customers, and what do they want from you? Specifically, what strategy have you adopted to generate a competitive advantage within your new industry? If you’ve chosen a differentiation strategy you will be looking for customers who want whatever value you’ve managed to add to the product, and are willing to pay whatever markup you are charging for that. You will also need to figure out what advantages you offer over the existing products in the field, and whoever makes those. If you have decided on a low-cost strategy you need to establish parity with the competition, and explain how you are managing to produce a comparable product at a lower price. Either way, you need to define who your target audience is, and how many of them you expect to serve…
Ideally, of course, you would want to determine how big the market for your product is – that is, how many people in the community, state, country, region or world (as appropriate) want to buy what you make, and of that number, how many of them will actually be able to. But if your strategy is correct, you should either be offering a better product than the competition, offering a comparable product at a lower price than the competition, or offering a specialized service to a segment of the market that have never been specifically served before; the question of how big the market is in absolute terms is only important if there is more capacity than customers (which will drive down prices) or if you have more potential output than you can effectively sell. For the purposes of the business plan, what you need to establish is how many people you can reasonably expect to reach and what percentage of those people you expect to become your customers…
As previously noted, if you expect that one out of every 500 people you hit with spam emails will end up buying your product, and you need at least 1,000 sales each month to break even, you need to explain how you will reach 500,000 people with spam email each month; if you expect that one out of every 1,000 people who see your television commercial will become customers, you need to explain what sort of commercials you are going to make, where you will place them (channel, market, time slot, etc.), and why you believe that 1,000,000 people will see them. If you’re going to purchase a table at a local event or sponsor a local activity, you will need to account for how many people will see you, how many will want to do business with you as a consequence of such a sponsorship arrangement, and how many of those people will actually fit the profile of your customers…
As you write this section, you need to explain to your audience why you have selected each type of promotional activity, and how you expect to gain customers through each one. Even if all of your assumptions are good, and you are reaching all of the people you wanted to, none of that is going to matter if you don’t have some means of generating revenue at the end of the process. Putting product or service information up on the Internet serves no purpose if there is no way for customers to purchase anything from you once they have viewed the information, and running television ads serves no purpose if the spots don’t tell people where or how they can obtain your product. You can’t sell people anything if they don’t know you’re there, but no matter how well you publicize your product or your company, you’ve still got to sell it…
Here again, the key question to ask yourself is what would you want to know if you were being asked to invest your own money in such a venture. If it’s not clear to you how you expect to make money on the venture, then it’s also not clear how an investor could expect to make back their money, let alone turn a profit. You may not be able to show a simple equation of this many people will read our ads online, this percentage will be interested, and this percentage will call us, resulting in this many pitches, this many sales, this many returns, and this many stolen credit cards and cases of identity theft – but that’s no reason not to try…
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