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What to do to stop sinking when
your business plan has sprung a serious leak.
Dear Smallbiz Adviser:
Hi. I am in the retail business of cellular phones and wireless
service. Back about three years ago, the business for wireless
service was excellent, but today the industry has become saturated
because of all the competition and digital services making it truly
affordable for everyone to act on. I would like some advice
to see what direction I should go now. How should I change
my business that would be different from the rest?
Thank you,
Joseph
Dear Joseph:
I'm glad you asked the question. Too many small-business owners
sink because they won't repair a business plan that has sprung a
leak. They stubbornly bail water and bail water, but never fix the
leak -- or jump on another ship that's similar to the original.
The fact that you see the need to change means
you're already ahead of the game.
A saturated market tends to dilute an individual
business' sales. If you haven't already done so, you need to precisely
measure that dilution and search for other weaknesses by answering
the following questions:
- Has the percent of gross
sales remained more or less constant?
Gross sales represent total sales minus the
cost of sales. In your case, one prime example of cost of sales
would be your product cost. If you have salespeople on commissions,
those commissions would also count as costs of sales. So now I ask
if your percent of gross sales to total sales has risen, remained
the same or declined. If they have risen, this would indicate your
prices have not risen with costs.
- Has the percent of operating
expense to gross sales remained more or less constant?
Operating expenses are those that occur whether
or not you are making sales. They typically include telephone, rent,
utilities, salaries and more. If the percent of operating expenses
to gross sales has risen, then you have not adjusted prices upward
to account for the increased cost of doing business. If the percent
of gross sales to total sales has also increased at the same time,
your pricing problem is compounded.
- Have you maintained a
consistent pricing level and pricing policy throughout?
If the competition has increased, the forces
of supply and demand are pushing product and service prices down
-- and you could really be in trouble. That scenario suggests a
need to trim expenses.
- Have you evaluated
how your advertising dollars are targeted to your customers?
If cell phones have gone from a luxury to affordable
for everyone, a shift of this nature suggests the traditional advertising
media needs to be re-evaluated. In the past, you would have advertised
in places where a certain demographic example of the typical customer
would have been found reading or driving or buying. Now, more people
with lesser incomes and other demographic characteristics are buying.
So where is the best place to advertise your business? Do you believe
it would be the same as in the past? I don't believe so. You may
pursue your traditional advertising media, but may now want to consider
alternatives where the more typical customer can be found.
- Have you compared
your product lines to those of your competitors?
Do you sell the same products and services as
in the past, or have you expanded product and service lines? What
is the competition selling? If you sell the same product and service
as the competition, and assuming your financials are in order, you
may have an opportunity to stand out. Perhaps there are certain
types of products and services directly or indirectly related to
what you sell, are not found in the competitors' shops, but would
definitely be of interest to your consumers.
Check out Bankrate.com's small
business ratio calculators to chart your company's progress,
uncover trends and point to potential problem areas.
One last thing I want to address is the matter
of repeat business. I strongly believe that most successful ventures
are the result of repeat business. Do you have lots of repeat business?
Is that a common characteristic of your type of business?
There are two steps to evaluate your prospects
for repeat business:
- Examine the financial statements to determine
whether the pricing structure accommodates any rise and fall in
cost of sales and operating expenses.
- What is the successful competition doing
that can't be found in my business?
First address those matters. If your evaluation
uncovers no flaws in your operation, and you want to stay in the
market, resign yourself to reduced gross profits. If that's an unacceptable
answer, consider an alternative business venture. Whatever the decision,
you must ultimately succeed in finding a way to stand above the
competition.
I wish you well.
Bankrate.com writers base their answers on our editorial
content and advice of financial professionals. We make no claims
or representations about the accuracy, timeliness or completeness
of such content, advice or the answers provided to you. Our content,
advice and answers are intended only to assist you with your financial
decisions. However, by its nature such information is broad in scope.
Your financial situation is unique, and our content, advice and
answers may not be appropriate for your situation. Accordingly,
we recommend that you get different opinions and seek the advice
of your accountant and other financial advisers before making any
final decisions or implementing any financial or investment strategy.
-- Posted: July 7, 2000
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