Half a Loaf Blog

What are your customers worth to you?

Start-up expert Brian O’Kane poses an interesting question.

The concept of the life-time value of a customer, highly developed in the USA, is only slowly beginning to catch on in Europe. It rests on two principles:
o It’s easier to retain a satisfied customer than to find a new one.
o Satisfied customers not only buy again (and again and again …) but they encourage others to become customers.

To test the first principle, think of your own shopping habits. When you are buying something you buy regularly, from a shop you use regularly – the daily newspaper from your local corner-shop – how much thought goes into the purchase decision? Almost none. You simply add the newspaper to whatever else you are buying. But, if you are buying some thing expensive from a supplier you do not know, you spend time checking out them and the product, before you finally make the commitment.

Most people are the same: regular purchases from familiar sources are made quickly, while new purchase relationships take longer to establish. Customers build up a trust with their regular suppliers. And once the trust is established, repeat sales follow easily. Thus, it is easier to develop new sales based on that trust than to develop new customers from scratch.

So when you win a new customer, do not think of them in terms of that single first purchase only. Think of all the repeat sales you will make to them. For example, a customer who buys €20 of petrol in your garage every Saturday morning will buy over €1,000 of petrol in a year. If he or she lives in the area for 10 years, and continues to buy petrol from you, they will buy €10,000 of petrol over that 10-year period. If someone offered to buy €10,000 petrol from you, wouldn’t you be extra nice to them? This person is offering to do just that – but just not all at once.

Everyone wants big-spending customers, not small-purchase customers. But, looked at over the longer-term, your small-purchase customers are high-spenders too.

To calculate what your customers are worth to you, multiply their average purchase by the frequency of purchase (in the example above of €20 of petrol a week, €20 x 52 = £1,040), and then again by the length of time that you expect to hold them (again, over a 10-year period, €1,040 a year becomes €10,400). This puts a clear money value on retaining your customers for the long-term.

The second principle again can be tested against your own experience. When you are pleased with a purchase, particularly a significant purchase, you tell other people about your experience and recommend them to use your supplier. Research shows that satisfied customers tell four other people about their experience. So you can take your customer value calculated above and multiply this by four, since you expect that one satisfied customer will generate four new customers. And you could multiply further since, if these new customers are satisfied, they will each tell four more, who will become new customers and so on.

But, if you disappoint a customer, they tell nine others, probably exaggerating the seriousness of the problem and they almost never come back themselves. So you have lost 10 customers – perhaps even more if the story spreads.

So it’s very clear that satisfied customers are valuable creatures and should be looked after.

Customer service
And now that you know what your customers are worth to you, what do you do to show it?

Customer service is probably the primary means of creating repeat customers. In most cases, the customer can buy a similar product or one that does the same job elsewhere, probably for around the same price. That’s the competitive world in which we live. So customer service is the feature that can distinguish your business from your competitors.

Again consider your own shopping experience. How often do you return willingly to a store where the staff are surly, unhelpful or downright rude? Not any more often than you can help. But how often will you visit a store where staff are friendly, eager to help and appear to value your business, however small it may be? A lot more often – sometimes you will even go out of your way to visit that store over others that are closer or perhaps even cheaper.

Look at the buying experience from your customers’ point of view. What can you do as the seller to make that experience as pleasant, as easy and as uncomplicated as possible? Decide and then do it. And keep on doing it.

Good customer service is not a once-off. Nor is it something that is decided once and set in stone forever. Good customer service keeps evolving, changing as customers’ needs change. But it’s the key to keeping those valuable customers.

Brian O’Kane is managing director of OAK TREE PRESS (www.oaktreepress.com), author of Starting a Business in Ireland and Could You Be Your Own Boss?, co-author of Starting Your Own Business: A Workbook, and webmaster for www.startingabusinessinireland.com.

Business Planning

Brian O’Kane explains what involved in business planning – and why it’s different from writing a business plan

Research and anecdotal evidence both show that an effective business plan is one of the major elements in successful business start-ups. The fact that almost 50% of new businesses world-wide fail within three years of start-up, and that 75% of these failures can be shown to be due to lack of planning, emphasises the importance of a structured approach to business planning. It is not enough to know where you want to go, you also must know how you are going to get there. A good business plan offers you a route map to success.

The benefits of business plans are dependent on how they are used – as live documents that bring clarity of thinking to your actions or as something that needs to be written simply to get finance for your start-up. While fund-raising is often a necessary purpose of business planning, it is certainly not the only, or indeed major, purpose. In fact, the main reasons for business planning are:
o To establish the fundamental viability of a project
o To define realistic goals for the business and map out the steps and intermediate targets required in achieving them
o To act as a yardstick for measuring progress against the targets
o To communicate ideas to outsiders, particularly those outsiders you are seeking to persuade to invest in the business.

Business planning for a new venture is a process that defines the goals of the business and the means by which they will be achieved. The process involves a thorough analysis of the major factors involved in achieving success in a new business. The output from the process is a formal business plan document that records those goals and factors. This distinction between process (business planning) and output (a business plan) is critical – and the business planning (process) is more important than the business plan (output).

The process of business involves asking – and answering – these key questions are:
o Are you the right person to set up and run a business?
o Have you got a feasible idea?
o What formalities must you complete before you start your business?
o What sales do you expect and how will you generate them?
o How, and with what resources, will you meet your planned sales?
o Can you describe the people you will need and how you will organise them?
o How will you fund your business?
o Have you the best plan possible?
o Have you got a document that adequately captures all your strategies, targets and projections?

Although apparently simple, these questions are very powerful. Answering them well (there are no “correct” answers in the real world) leads to a stronger business and one more likely to achieve its aims. This is because the questions see the business from the viewpoint of a reader, not the writer, of a business plan. In answering these key questions, you answer the questions that will be in the forefront of a reader’s mind, be that reader an investor, a lender or potential participant in the new venture.

Depending on the reader, of course, there may be additional questions. For example, a banker will be concerned about security for a loan and the ability to repay the loan over an agreed period. An investor will want to know what they will get back for their investment and what is the “exit strategy”. A support agency providing grants may be concerned with the number of jobs being created. But whatever the background of the reader, each will want clear answers to all of the key questions posed above. If you cannot provide clarity of thinking in dealing with these questions, then your business idea has not been thought through fully and you need to do more work. In many ways, answering these questions acts as a safety valve that prevents you from establishing a new business without understanding first the requirements of the business.

And, if you doubt the value of business planning, just look at the success rate of franchises – generally held to be over 70%, sometimes as high as 90% – which is a result of the franchisor, with all his/her experience of the business, doing the bulk of the planning for the franchisee.

Brian O’Kane is managing director of OAK TREE PRESS (www.oaktreepress.com), author of Starting a Business in Ireland and Could You Be Your Own Boss?, co-author of Starting Your Own Business: A Workbook, and webmaster for www.startingabusinessinireland.com.

Steps to Starting a Business

Brian O’Kane explains the steps involved in a start-up.

The steps involved in a start-up include:
o Assessing your own suitability and readiness.
o Finding an idea.
o Evaluating your idea.
o Looking for funding and assistance.
o Deciding on a legal structure.
o Registering for tax.
o Registering for any licences or permissions required.
o Finding premises.
o Setting up accounting systems.
o Preparing financial projections.
o Getting the necessary finance.
o Writing a Business Plan.

On your own suitability, think of your skills, experience, education, contacts, family situation, financial situation and health. Be realistic – if this is not the right time, wait.

Then find and evaluate your idea for a business. Often, this comes earlier and is what sets you thinking about starting a business – but some people decide first to start a business and then look for an idea. If you’re looking for an idea, some of the County & City Enterprise Boards (CEBs) (www.enterpriseboards.ie), the State network that supports businesses with less than 10 staff, run Idea Generation workshops that can be useful. In finding your idea, don’t dismiss buying an existing business (costs more but avoids the risks of the start-up stage) or buying into a franchise (much reduced risk, though less potential) (www.irishfranchiseassociation.com).

Evaluating your idea means market research, some of which can be done on the Internet or in libraries but which is best done among your potential customers, face-to-face. Most would-be entrepreneurs don’t understand the need for market research and are unwilling to put in the effort. But, unless you can answer the following five questions, with answers that show that you have a viable business, you need to do market research. What kind of market research and how much of it? As much as it takes to answer these five questions:
o Will anybody want to buy my product / service?
o Who are these people?
o Why will they buy? (and Why will they buy from me?)
o When will they buy? (and How often?)
o Where will they buy?

Unless you can answer these questions, you should not start at all.

At this stage, you should be actively looking for sources of funding and support – you won’t be ready to submit an application for a loan or grant yet, but you should be finding out who might give you one and on what conditions.

The County & City Enterprise Boards (www.enterpriseboards.ie) should be your first port-of-call. There are 35 CEBs across Ireland. They provide grants, training, mentoring and advice. If you are in a rural location, and your business idea will contribute to rural development, talk also to your local LEADER+ organisation (www.irishleadernetwork.org). If you are planning to develop a high-tech, knowledge-based business with significant export and employment potential (€1m+ in sales, 75% export, 10+ staff – all within 3 years), talk to Enterprise Ireland (www.enterprise-ireland.com). Start finding out what the different banks offer – talk to your own bank, where you have your personal bank account, and at least one other. First Step (www.firststep.ie) offers micro-finance, very small loans, to people who might have difficulty otherwise in accessing bank finance.

Lots of people get hassled by the formalities involved in setting up a business – don’t, it’s only paperwork; if that’s not your skill, pay someone else to do it for you. You can set up as a sole trader or as a partnership, simply by registering for tax with the Revenue Commissioners (www.revenue.ie). To set up a limited liability company (highly recommended, since it protects you from losses in the business – unless you give a personal guarantee, for example, to a bank), you need to register with the Companies Registration Office (www.cro.ie) and pay a fee, as well as registering for tax. A limited liability company must have two directors, one of whom can also act as company secretary, and usually has two shareholders (although one shareholder is possible). After registration, each year, a limited liability company must submit returns on its activities to the Companies Registration Office.

When registering for tax, you will need to register for taxes on:
o Your profits – Corporation Tax (limited liability company) or Income Tax (sole trader or partnership).
o Your sales – Value Added Tax (mandatory for sales of goods above €75,000 a year or of services above €37,500 a year).
o Salaries paid – PAYE / PRSI.

As a first step towards understanding your responsibilities in relation to tax, download the Starting in Business booklet from the Revenue Commissioners’ website (www.revenue.ie).

www.startingabusinessinireland.com