Please read the article and answear about qeustions. Distribution2 Other chapter

Question

Please read the article and answear about qeustions.

Distribution2

Other chapters have answered a lot of the “who,” “what,” “how,” and “why” questions about small business; this chapter deals primarily with the “where.” There are two basic “where” questions to be considered. The first one is, “Where are my customers?” In answering this question, you are primarily interested in figuring out how to get your product or service to them so that they have the opportunity to buy it. Distribution is the process of getting your product to the customer. The second question is, “Where should I be?” This question can be closely tied to the first—if your business is a restaurant, you need to be exactly where the customers are. Other businesses can be located at a distance from their customers—and often find advantages in doing so.

To help explain why channels are important to your marketing strategy and profits, think about the implications of the different channels shown in Figure 11.1. They differ in terms of the number of intermediaries between you and the eventual customer. Keep in mind that every one of the intermediaries will want to make a profit for selling your product or service, so they will each add their share to the price you sold to them. So you created a product that cost you $5 to make and sold it to an agent or to a retailer for $10 to resell. They want their profits, so they mark the price up to $20.

Realize that the more intermediaries you add, the higher the eventual price of your product. Also keep in mind that all of your profits are based on your first sale of the product. Hold that thought a second.

As the manufacturer of the good or service, you have the ability to set the manufacturers’ suggested retail price of your product. To do this, you need to think of how many intermediaries are likely to be in the channels for your product. In the example above, with a single intermediary, your $5 product costs end consumers $20. That approach is called direct sales, and is a part of direct marketing. But what if there is a second intermediary, for example, from you to a whole- saler or distributor, who in turns sells to retailers? Not everyone doubles the price they paid for a product, but for this exercise, if they do double the price, then your $5 product costs consumers $40. If your product is popular, then everyone is happy—the consumers certainly are and because of their happiness, the retailers, wholesalers, and you are probably happy, too.

Because of the math of intermediaries in channels, the possibilities for direct marketing becomes more and more attractive. Why? Well, it would not be fair to all those intermediaries if you sold your product to the public for $10. In fact, doing so would pretty well assure that few intermediaries could compete with you and make a profit. But because you have set the retail price at $40 to keep your intermediaries happy, you too would sell to the public for $40, in which case instead of your usual $5 profit per product sold to other resellers, you are suddenly making $35 profit per sale! Done this way, your resellers are happy and not overly worried about you as a competitor, and you are happy because direct sales can be some of the most profitable ways for you to make sales. We go into direct marketing and direct sales in this chapter. Direct Marketing

For many entrepreneurs—and larger firms as well—direct marketing is the way to go. It can be as simple as the child who sets up a lemonade stand in front of her or his home, or as complex as a four-color printed catalog with a mass mailing. Direct marketing can be relatively inexpensive. It also provides more control over where your product or service goes, the information that gets passed along to the consumer, how the product is used, and final pricing. You have already been introduced in Chapter 5 to several forms of direct marketing through the Internet, including eBay. Even having learned these, there remain about as many forms of direct marketing as there are entrepreneurial ideas, and some of the other more common ones are discussed below.

Word-of-Mouth3

This is a great way to get customers and is usually the first technique an entrepreneur uses. Word-of-mouth4 is discussed in detail in Chapter 10.

Direct Sales

Direct sales (industrial, door-to-door, party sales, vending) can take several forms. This is the primary way of selling to businesses. A salesperson (often you) contacts industries, churches,

schools—whatever type of business is likely to use your product or service—directly. The salesper- son meets with the decision maker, presents the product, and hopefully makes a sale.

The lemonade stand mentioned above is also a form of direct sales, albeit a little less professional than you may want to be. A more polished approach is a booth at a local fair, cultural event, flea market, craft fair (all of which are discussed in Chapter 5), trade show, or association event. The cost of leasing space can be less than $100 for a local flea market to quite expensive for national trade shows. For a flea market, a simple card table may be appropriate, while the cost of a professional booth at a major trade show could easily be $100,000. The key here is to pick the event most likely to attract your target market and least likely to make a serious dent in your pocketbook. Start small and move up as you get more sales revenues.

Some of the other techniques discussed in Chapter 5 that are also direct sales methods include door-to-door sales (remember the Avon lady?), party sales (think Tupperware or Mary Kay), and vending machines. For products that need demonstrations or detailed explanations, door-to-door selling allows you to show consumers how your product works in their home. Part of the success of home sales is that it is hard for consumers to say no after the salesperson has spent some time in their home—it’s just not hospitable. This method is made more difficult these days with dual- income families, because evenings are usually the only time to catch people. Consumers are often reluctant to invite strangers into their home, but you might be able to at least introduce yourself and leave behind information about your product or service. Avon used to sell predominately through door-to-door sales but has branched out into Internet, mail order, and mall kiosks sales in order to combat declining door-to-door sales for the reasons just mentioned.

Vending machines aren’t appropriate for every product, but they do offer the flexibility of hav- ing your product available around the clock and at convenient locations for your customers. Vend- ing machines are typical for less expensive, convenience products. The key to success is volume achieved with machines located everywhere. People are willing to pay extra in order to have the product readily available. Compare the price of a can of your favorite beverage from a vending ma- chine to what you would pay in the grocery store. The disadvantages of vending machines are their high maintenance and vulnerability to vandalism.

Party sales usually require a range of similar items to be sold, and this kind of selling is not appropri- ate for every product. Typically, a host or hostess invites a number of friends and family members to his or her house, while a company representative (you, at first) demonstrates the product. Samples of the products as well as catalogs are available for all the guests to browse through, and orders are taken at the party for later delivery. Typical party sales products include everything from laundry aids to makeup to lingerie to cookware to housewares. Two of the disadvantages are the sanctity of the home and the re- luctance of people to open up their homes to strangers (salespeople). As these parties take several hours of a salesperson’s time and can usually be held only in the evening, one person is limited to how many parties (sales) a week he or she can handle. Generally, the successful companies using this method have hundreds of salespeople who earn a percentage of each sale they make. Many entrepreneurial firms have grown tremendously from a party sales approach—Mary Kay, Amway, Pampered Chef, and others.

Direct Mail and Its Variants5

Direct mail can take many forms—postcards, catalogs, videos, mail orders, sales letters, bro- chures, leaflets, CD-ROMs, faxes, e-mails, and many others. A variant of this, Internet-based direct mailing, is         introduced       in         Chapter           5 .

There are several advantages to the direct mail approaches: the ability to sell on your schedule, low costs for getting started (especially if you place your goods in others’ catalogs or online), the ability to get by without major inventory investments, and the potential for selling to large markets. It plays well with customers too because they tend not to see direct mail as a form of home invasion (as they often do with door-to-door sales or telemarketing); they can read it at their leisure, and they have something they can set aside until they need it.

Of course, there are challenges to this approach including adequate preparation before selling, the need for writing and photography skills, and a way to get customers’ attention. Perhaps the greatest challenge is the need to find the right market for your offering. In direct mail, market trans- lates into getting the right mailing list or sales vehicle.

There are many companies that will sell you a list of addresses (even a list already typed on labels), and these are often available for virtually any target market you may choose. The cost of these lists can vary, but current rates are about $60 to $75 per thousand names. Try Focus USA (www.focus-usa-1 .com), or Practical Marketing (www.practicalmarketing.net) or do an Internet search for direct mail lists. Also, professional organizations and clubs sometimes will sell their mailing lists for a relatively modest fee.

There are also low-budget ways of getting a mailing list. Often membership rosters are distrib- uted to members of certain organizations. If such an organization meets your target market, you can have the list for the price of membership. One caution, though: Sometimes members are expressly forbidden to use these lists in any commercial way. However, if it truly is a product or service that a number of these members are likely to want and if it is a one-time “soft sell” mailing, you’re prob- ably okay.

Those sales vehicles mentioned above refer to the magazines, newspapers, or websites you se- lect to display your mail order ads. If you are targeting doctors, advertising in the local newspaper would get you most of them, but you would also be paying for the ad to be seen by 98 percent of the readers who are not doctors. There are magazines and websites that focus on particular groups. These include the trade magazines you learned to find in Skill Module 3.1. For websites, a quick Google search of “doctor’s websites” will get you quickly started. You can use a service like Alexa .com to check on the overall traffic to sites, although the magazines and sites themselves should give prospective advertisers like you more detailed information on their visitors.

The other challenges mentioned above relate to preparing an ad that does a good job of answering the customers’ questions and entices them to buy.

Everyone is familiar with catalogs. They offer customers a description and often a picture of the product and tell the customer how to order it by mail, phone, or online. Catalogs are usually targeted at particular types of consumers and focus on particular types of products.

You can start a catalog of your own. Depending on the size and quality of the catalog, costs for print versions start at around 50 cents each and can rapidly go up to $2, $5, or more. Typically, the number of catalogs you will have to order is 5,000 at a minimum. Online catalogs are a less- expensive approach. Creating and disseminating a catalog online saves you the cost of printing and mailing. Generally, web-hosting services offer shopping baskets that are in fact online catalog- making programs.

However, most part-time entrepreneurs typically try to get their products into existing catalogs. Here the catalog firms function as your first customer; you want to convince them to carry your product. You can find catalogs through the www.catalogs.com site, from the Online Learning Cen- ter, or from print directories in the reference section of your local library.

When you have found the catalogs, try to obtain copies and check to see how your product would fit. Once you’ve identified your target catalogs, the key person you will be trying to find (by phone, mail, or online at the websites) is called a buyer. For the bigger catalogs, there will be several buyers, each specializing in a few product areas. Buyers usually require pictures of the product, and some will want to see the actual product. Buyers are used to buying based on preproduction models and prototypes. This works well with part-time entrepreneurs trying to maintain a microinventory. A microinventory is a set of goods or services that consists of only one or a few items. Microinven- tories are the small business’s answer to just-in-time inventory methods in big business. In micro- inventories, you try to buy your product or prepare your service only after you get an order. For this to work, you need a stable, consistent, and secure source of inventory supply.

When possible, try to talk to the buyers by phone first to make sure your product would fit their needs. Also make sure you check out each catalog’s requirements for companies listing with them. There are many factors to consider such as whether the catalog charges for a listing; whether they hold the inventory (and if so have they bought it), or do they expect you to drop ship it; and whether the catalog gets an exclusive on your product and the right of first refusal for future versions or even your entire line. While these are policies, with thousands of catalogs, there are always other catalogs, probably with different policies, so negotiation may be possible. Also, check the catalog out with the Better Business Bureau (www.bbbonline.org) to make sure they have a solid track record among entrepreneurs like you. Entrepreneurs typically send buyers a packet with ad copy and pictures of the product. It often helps to provide different versions of the ad copy and different pictures to maximize the chance buyers see something they like. If possible (or if asked), send a sample product.

Catalog sales, like most business-to-business sales, are rarely immediately successful. Be pre- pared to come back repeatedly to catalogs that best fit your product or market. Persistence shows you are serious about the business.

Also, think about local wholesalers. The phone book or business directory at the library can point you to wholesalers who supply local businesses with products. If you know a business your product would fit, you can ask the owner who the wholesaler is and build on that. The materials developed for the catalogs work in terms of introducing your product to wholesalers too. The product descrip- tion and photo for a catalog can quickly be made into an offering circular that you send to wholesal- ers to test their interest.

Three other direct mail sorts of activities are worth mentioning: direct faxing, e-mail, and daily coupon sites like Groupon. Particularly for business sales, direct faxing can be a way of reaching potential clients. Fax numbers can be obtained in the same way as mailing lists. Unfortunately, frequently faxes are of relatively poor quality, and often the person receiving the fax is not a deci- sion maker.

Anyone who has an e-mail account is subject to this form of direct mail, commonly known as spam. E-mail addresses can be purchased just as can regular addresses from the same companies. There is also inexpensive software (see www.emailsmartz.com, for example, or do a search for “e-mail marketing software”) that can easily generate millions of possible addresses. E-mail is one of the least expensive forms of direct mail, and the cost per recipient is, by far, the lowest. There is now a nationwide “can spam” law that overrides the 35 different state rules direct marketers had to consider previously.

However, in some cases state laws are more stringent and must be followed as well. For example, in California, the e-mail must state “ADV” in the subject line. Most of the requirements of the na- tional law are fairly straightforward:

? Don’t in any way falsely misrepresent who you are, where the e-mail is from, or that the e-mail is anything other than a sales pitch.

?          Randomly generated e-mail addresses or harvested e-mail addresses are not to be used. ? All e-mails should allow recipients the opportunity to “opt out” of receiving further e-mail

correspondence from you—and you must obey their wishes on this.7

Spam is a hot topic, and legislation changes are likely, so be sure to check on current rules. “Opt- in” e-mail, where recipients allow you to e-mail them, is legal and much more acceptable to the potential client.

One of the areas of explosive growth on the Internet has been around daily deal sites. Groupon .com was the first to strike it big, but today there are literally thousands of sites. There are two major types. One is coupon sites, where you can buy a coupon that entitles customers to a discount on a product or (more often) a service, for example, getting a $50 massage for $10. These are intended largely as a way to build awareness of and traffic to your business. But be ready to manage a major spike in customer demand immediately after a coupon comes out. Many businesses find that they have trouble meeting demand if there are too many coupons in customers’ hands.

The other type of daily deal site is called a group buying site, like 1saleaday.com, which usually offers viewers a chance to buy a product at a discount. This is a way to get rid of excess inventory, but keep in mind that the discount levels for such sites can be very high, squeezing the profit margin severely. For either type of daily deal site, make sure that you can limit the numbers of coupons or products that you offer. Also look for sites that have success with your type of offering and your target market. Today there are thousands of local sites, and they, as well as most of the major national daily deal sites, will let you focus your listing in particular geographic areas.

Telemarketing

We have all received telephone calls from salespeople (or worse yet, recorded messages) wanting to sell us everything from aluminum siding to vacations. While most consumers find this method particularly annoying, telemarketing still remains a viable form of direct marketing because it works. It is, however, the most expensive form of direct marketing. Currently, many states have adopted “do-not-call” lists, and there is a national do-not-call list as well. The Direct Marketing Association maintains a comprehensive listing of national and state do-not-call lists (see www .the-dma.org/government/donotcalllists.shtml). These are currently facing some legal challenges, and the present situation should be checked out before you consider a telemarketing campaign. Target market telephone lists may be purchased from the same companies as mail or e-mail addresses—theoretically cleansed of all do-not-call registrants—or random dialers (computers that use random number tables to generate possible phone numbers) may be used.

Inbound telemarketing is a different story. Here, the customer calls the manufacturer or service provider. This may be in response to a direct mail piece, direct response advertising, or other meth- ods. A major consideration for the entrepreneur is handling the phone lines. Your California cus- tomer calling at 8 p.m. reaches your home in Connecticut at midnight. This is where an answering machine with a message stating working hours (located far from your bedroom or with the sound turned off) is a necessity.

If inbound telemarketing is your primary way of doing business and if there are enough calls (and profit) to warrant it, there are firms that will answer these calls for you. You can find them by search- ing for “call center services” on Google. Generally these firms can take orders or send on additional information; more technical problems or special situations will require your personal attention. The cost varies, again, based on the amount of service and volume of calls. These centers can also pro- vide services in several languages if this is critical for your firm. Direct Response Advertising

In direct response advertising, you place an ad somewhere—magazine, newspaper, radio, bill- board, or television, for example—that includes a phone number, e-mail address, or snail-mail ad- dress and wait for the orders to come in. (Placing a website in the ad is technically part of Internet marketing, which we get to in a moment.) This can be as simple as a classified ad in the newspaper or as elaborate as a half-hour infomercial—and the costs associated vary as much as the type of ads. A chart showing the cost per thousand (CPM) for a variety of media is given in Figure 10.2.

The pros and cons of your media choice are just about what you’d expect. Television can be expensive, but it attracts a large audience and is a good way to demonstrate what your product is ca- pable of doing. Try cable channels for the cheapest rates. Many stations offer discounted advertising for small businesses. This might not amount to much more than an announcer reading your ad over the credits of the local news, but it’s a starting point.

Some of the home shopping networks may be appropriate if your product meets their criteria. These networks publish their standards on their websites and may offer days for inventors to dem- onstrate their products to studio personnel—a chance to sell your concept. Products that work well are those that have a wide appeal and have advantages that are easy to demonstrate.

A magazine allows for very specific targeting—a hobby, sporting interest, a certain age, or other demographic group—and often offers classified type ads (less expensive) or multipage, full color ads (much more expensive). Newspapers allow geographic segmentation; that is, they are a great source if you want to attract people in a specific geographic region (think restaurant, day care center, and the like).

Magazines are also very appropriate places for direct response advertising for business-to- business selling. Virtually every industry, trade, and profession has a magazine dedicated to it. Find- ing the correct one and placing your direct response ads will give you high contact with your target market. Try Gale’s Directory of Publications and Broadcast Media or the Encyclopedia of Asso- ciations, probably at your library, for lists of industry trade magazines and trade associations. You can also refer back to Chapter 3 or the Online Learning Center for Skill Module 3.1, “Finding Your Trade or Professional Association and Their Magazines,” for some help along these lines.

Radio ads provide both geographic and demographic segmentation; if you do custom designed cowboy boots or train horses, a radio ad on the local country western station might be just the right place. On the other hand, radio audiences are generally highly distracted; people listen to the radio while driving, or doing housework or other tasks and might not be able to drop everything to write down your phone number. Billboards reach local people but do not permit a lot of details. Other possibilities include signs in buses and cabs or at bus stops. For a start in direct response advertising, consider a classified type ad—no pictures, limited graphics (if any), and relatively low cost. If your target market is a specific geographic region, newspapers might work best. If it is specific to a hobby, job, sport, or other interest, try a magazine catering to that interest. If the budget allows, try a quarter- or half-page ad with some color or mod- est graphics. Magazines will sell you an eighth or sixteenth of a page ad.

Remember that there are also the relatively low-cost methods of Internet advertising, such as videos, blogsites, postings on Facebook or Twitter, and a host of other techniques (described in Chapter 10) that can be as effective or even more so than the traditional marketing vehicles.8

Guerilla Marketing10

Guerilla marketing is a relatively new concept in marketing, but the start-up company’s best friend. Guerilla marketing is a term for unusual and nearly free advertising. While it can be sim- ply advertising—stating why your product or service is great—it’s extremely effective as direct response advertising when you add your phone number, address, website, or other contact informa- tion. Guerilla marketing includes everything from placing flyers under windshield wipers of cars to waving signs at passing cars to hanging information on doorknobs to placing business cards on bulletin boards at the grocery store. For the cost of copying and a bit of shoe leather, you can get your message out to a lot of potential customers. Then again, if you aren’t interested in delivering the message yourself (How valuable is your time?), there are many companies that will do this for you. CIPS Marketing Group (www.cipsmarketing.com), owned by the Los Angeles Times, will distribute a newspaper “ride-along” advertisement, doorknob hangers, flyers, or product samples to selected target neighborhoods for as little as $35 to $130 per thousand. It will even design and print your advertisements for you for an extra fee.

The key here is to catch the customer’s attention. We talked a little earlier about daily deal coupon sites, but when it comes to couponing, there are a myriad of ways to get the word out to your con- sumers. Susan P., moving into a new house in a new subdivision, became part of the target market for landscapers, house cleaners, blinds and drapery manufacturers, pool installers, satellite television installers, painters, decorators, local restaurants and merchants, and a plethora of other such small businesses. Daily there are several pieces of advertising trying to get her attention. A few—very few—are slick four-color brochures or in-mail catalogs and coupons. The majority are low budget or homemade. What attracts her attention? “Coupons are a good bet; I’ll try out a restaurant or neigh- borhood merchant if I get a discount or free dessert or some other gift. Others that catch my eye are those that are different. For example, a landscaper left his business card—just like several dozen before and after him—but his was in a small plastic sandwich bag with a few samples of decorative gravel and bark. It cost him only the time to make these, but this was much more appealing than just sticking a business card in my door.” In another case, a decorator printed her ad on a wallpaper sample—colorful and different!12

Find unusual and unique places to display your products. Can you wear your own creations? Can you pass out samples of your homemade fudge to your bridge club? Could you display your product alongside complementary products or services, such as a custom jewelry maker who arranges to display her product at the checkout counter of a local hairdresser, with both of them splitting the profits. Give your product as gifts, along with your business card or other contact information, and encourage the recipients to pass along that information to anyone who asks. A variant of this is to try a barter arrangement with local TV and radio stations. You give them your product or service for free or at a significant discount in return for their mentioning it, or preferably endorsing it, on the air. All of these approaches share the common quality of guerilla marketing—they are low-cost ways to gain a potentially high impact on your market. One popular recent idea is paying college students to wear T-shirts with a message on them, such as Shirtsinschool.com.

Multichannel Marketing

The term multichannel marketing refers to using several outlets for contacting your customers. If you include in your classified ad your phone number, your website, and your e-mail address, then you are a multichannel marketer. One customer may pick up the phone. Others will e-mail or browse your website. This simply allows your customers to contact you in the way they feel most comfort- able. Having your phone number, website address, and e-mail address on your packaging ensure that your customer can find you again should a retail outlet decide not to carry your product any longer.13

Distribution Issues for Direct Marketing

Even when your shippers pay postage, you’ll need to know where to go to find the information you need to add that to the amount the seller pays. You’ll need a decent postage scale and rate tables. These tables can be downloaded from UPS (www.ups.com), Federal Express (www.fedex.com),

or the U.S. Postal Service (www.usps.com). Tip: Charge a shipping and handling fee that includes postage as well as packaging materials. Most catalogs have a shipping and handling fee based on the dollar amount of the order. These companies also offer tracking software that can be down- loaded and installed on your computer to track your shipments.

Another option to consider, especially if you are doing quantity ship- ping, is to use a fulfillment center. These centers will warehouse your products, pack and ship them, and send an automated e-mail to your cus- tomers to let them know your product is on its way. Other services include credit card processing, supplying inventory levels to your website, reor- dering products, offering call center services, and handling returns.14 Fees vary, but they should be less than 10 percent of sales plus freight costs. Distributors are a good idea if you want to offer a whole line of products that you don’t have to buy or warehouse. In this case, the distributor ser- vices several retailers or e-tailers.15

How do you find these fulfillment centers or distributors? A good starting place includes www.fisglobal.com/products-retailpayments- ecommerce. There are also several companies that exist specifically for Internet sales businesses, such as Shipper.com for larger businesses and ifulfill.com for those companies with fewer than 50 products.16

Nondirect Distribution

In Figure 11.1 at the beginning of this chapter you saw wholesaler, re- tailer, and agent. These, along with distributors and a dozen or so others not mentioned above, are commonly referred to as intermediaries. Inter- mediaries—frequently small businesses themselves—provide the service of getting the product to the end consumer, including such functions as inventory control, advertising and promotion, delivery and warranty ser- vices, to name a few. For these services, they take a percentage of the profit. As a result, the final price the end user must pay is often four (or more) times the manufacturing cost.

How do you find out which distribution channel is correct for your product? One suggestion is to start at the end and work your way up by asking each link from whom they buy.17 At that point, you can determine other wholesalers or distributors that carry similar products and begin interviewing them to find the best fit for your product and target market. Another way to locate possible distribu- tors is to attend trade shows. The Manufacturers’ Agents National Association publishes a Directory of Manufacturers’ Sales Agencies, available in many libraries.

Unfortunately for the entrepreneur, many distributors and wholesalers are not interested in tak- ing on a start-up product. They are concerned about an unproven source and market, setup charges, and a multitude of other possible problems. On the other hand, talking to distributors—especially in product development stages—may often give you ideas on what to do and what not to do.

One way to get a distributor interested in trying your product is to be able to prove that it does sell. In this case, you may have to convince a single retailer to give the product a try. Dr. Bob Wag- staff, the inventor of the Orabrush, had gotten it into stores by literally walking in and talking to managers. As noted in the Small Business Insight, he faced a rocky road, but he persevered, working his way through the system.

Getting your product into a catalog may also convince a distributor that it’s a product worth taking, but how do you get into that catalog? One way is by showing your product at trade shows and gaining sales and recognition. This is the route that Steve Niewulis from the chapter’s opening vignette used. Sources for finding trade shows include the quarterly magazine, Job Shop Technology, or the website www.tscentral.com. You can also search using Google and the terms “trade show directory.”

Another way to get into a catalog is to find one that carries the type of product you have and for about the price you’ll want to charge. Call for their guidelines for submitting new products and follow the information you get carefully. If you aren’t already receiving such a catalog, you can check out resources such as the National Directory of Catalogs or The Catalog of Catalogs V: The

Complete Mail-Order Directory in your local library. Some will charge you a fee for warehousing your product, while others will simply pass the orders along to you.19

Virtually every industry, sport, hobby, or interest has its own trade shows and events. Regional events are usually a better place for the entrepreneur because you have lower expenses and less competition. Hit the library or Internet to find them, and be sure to have all the answers about cost, delivery, product advantages, and the like.

If catalog sales do not feel right and retailers do not seem interested in your product, an e-tailer20 might be willing to take a chance. Because of e-tailers’ low overhead and unlimited shelf space, they can afford to take a chance on an unknown firm or product. Sometimes, they will carry inventory, but often they just pass the orders on to you for fulfillment. You can find potential sites by doing an Internet search for “e-tailer.” Sometimes they will post information on how to submit product ideas, while other times be prepared to dig for phone numbers and names. Craig Winchell, the inventor of Conscience, an interactive board game for teaching children right and wrong, tried the American International Toy Fair, a trade show, with disappointing results. He found that EToys was willing to take a chance. EToys’ (www.etoys.com) initial order was six games in 1998; in 1999, Winchell shipped close to 10,000 units.21 With the kickstart from the EToys sales, by 2007 Conscience was sold at ten online catalog sites and more than ten retailers in the United States and Bermuda. In the end, though, Craig felt the board game would not give him the financial independence he needed. Today you can find Conscience on sale in several Internet sites, but Craig remains an entrepreneur making his money as a management consultant in Dallas.

International Strategies

When you are struggling to get through that first year of business, international sales are about the last thing on your mind. The U.S. Department of Commerce, however, indicates that large compa- nies account for only about 4 percent of all exporters, meaning the other 98 percent of the exporters in 2010 were small businesses.22

Entrepreneurs typically fall into three categories. There are those who realistically will never go international (for example, a restaurant owner or dry cleaner working from a single site). There are those who intentionally start international businesses23 (for example, import-export businesses), such as Peter P., the director of procurement for a Russian trading company, who saw a trading opportunity with the opening up of Eastern Europe and the former Soviet Union. Educated in the United States, he is of Ukrainian descent and speaks both Russian and Ukrainian.24 Last, there are those who think international business might be something they’ll do someday way off in the future. This section is primarily for the last two categories.

Thanks to the Internet, once a company has a website, it is essentially an international business, a whole new breed of firms known as born internationals.25 Potential foreign customers see the website and before you know it—or before you are prepared—the first international order rolls in. Even “website–free” companies aren’t exempt. A foreign visitor comes across your products and sees a need for it in his or her country, and here comes that order.

Some international orders aren’t all that difficult to handle. If the order is small enough, if the product or service is not highly regulated domestically, and if the country is one with which the United States has rather liberal trade such as Canada, the order processing may offer few or no head- aches. The customer may use a credit card or international money order, and the product ships in the mail without much more effort than figuring the extra postage. That’s okay for the occasional order, but more complex situations will require more time and effort on the part of the entrepreneur. The ideal situation is to consider and prepare an international strategy before it becomes a hit-and-miss method that is too cumbersome or before serious and costly mistakes are made.

Entrepreneurs have available to them the same options as large companies including wholly owned subsidiaries, joint ventures, licensing, franchising, and exporting. For most, though, an ex- port strategy is sufficient and is all that is covered in this section. It’s usually inexpensive, quick to start, easy to change, and less risky than other ventures. It has the additional advantage of allowing the entrepreneur the opportunity to learn about doing business abroad in case the company reaches the point of moving further. For U.S. entrepreneurs, the U.S. government offers detailed and useful help for exporters, including seminars and other training, export assistance, websites and reports, financing, insurance, and legal and collection assistance.

Putting together an export strategy involves answering three questions:

1. Are we ready? 2. Where should we go? 3. Whom do we contact over there?

There are many sources for assistance in answering these questions, and many good ones are free or almost free. One excellent resource is the U.S. Commerce Department’s report entitled, “A Basic Guide to Exporting” that can be found at www.unzco.com/basicguide.

Question 1: Are you ready to export? Exporting requires a different kind of thinking and prepa- ration from selling locally or even nationally. Are you going to target one country, a region, or the whole world? Do you know what customers want? Do you know what the import requirements are? What aspects will you handle, and which ones will you contract out? Are you ready for the costs and headaches of exporting? To see how you are coming along, you can check your readiness online at the U.S. government’s exporting site www.export.gov/, which provides extensive exporting basics, including a “readiness test” at www.fas.usda.gov/agexport/exporttest.asp.

Consider your product as well. Will your U.S. designed product fit an international lifestyle or needs? Clothing sizes are different—both in how they are numbered and what the sizes mean. A woman’s medium in the United States is an XXL in mainland China. Electrical currents are

different, as are various other safety and product standards, and the United States is one of only two countries that’s not on the metric system.27

There are several ways you can export. One is to use online services such as eBay. Approximately one-fifth of eBay’s sales are out of country.28 If you’re handling your international business this way, a lot of the rest of this section isn’t really for you until you want or need to change methods. Another is to work from personal contacts gained through school, travel, or family. Most exporting small businesses start with countries where they have had personal experience or support.29 These two methods are called direct exporting, since you are selling directly to foreign buyers or distributors.

If you want to use outside experts, there are three intermediaries who can help. With indirect exporting, you use agents, export management companies, or export trading companies as inter- mediaries to handle most of the exporting process. Direct exporters can also get help from freight forwarders. Freight forwarders are specialists in export-related activities including tariff sched- ules, shipping, insurance, packing, transportation arrangements, customs clearing, and other export details. (By the way, many agents, export management companies, export trading companies, and freight forwarders are themselves small businesses. They know exactly what problems you’ve faced and are much easier to approach than some megacompany.) The Small Business Administration’s Export Assistance Center can help you find one.

Question 2: Where should we go? The United Nations has 193 member countries in the world; chances are not all of them are right for your product. Even if your product should have wide appeal, it makes good sense to pick one or two as first markets. One of the safest bets is to consider countries that are similar to the United States—Canada, United Kingdom, Australia, for example. In those countries, you have few language issues, the culture is pretty close, the governments and economies are stable, and the people there are likely to want or need about the same kinds of products as people in the United States do. Should you decide to go further afield, those are the same sorts of things you want to look for—language and culture issues, government and legal situations, economic situ- ations, and peoples’ wants and needs. Here’s a good time to use those personal contacts mentioned earlier; if they live there, they are likely to be able to tell you if the product makes sense or not.

International marketing research isn’t cheap and can be difficult to do. Contacts are a valuable resource. Additionally, the U.S. government and world trade centers can give a lot of free or low-cost assistance. See Table 11.1 for a list of some of the major ones.

TABLE 11.1   Sources of Export Assistanc Question 3: Whom do we contact over there? You may already have international contacts through school, friends, travel, or other methods. If so, you’re ahead of the game. Even if they cannot help you with specific questions, they probably know someone who can. On the other hand, if you do not have any contacts, a lot of the government services you have already used can provide lists of poten- tial intermediaries or end users. In addition to the free services available, U.S. Commercial Services (www.export.gov) provides a number of levels of fee-based customized services. For $500, they offer their International Partner Search service, which will identify up to five potential businesses to work with you as licensees, agents, distributors, or strategic partners, and prequalify them based on your criteria. The government’s www.export.gov site offers a database of sales leads that can be searched for free by industry, region, or country. They also are the point of contact for catalog exhi- bitions which can get your product or service catalogs into the hands of potential buyers in specific markets (or at specific trade shows) overseas.

Other good ways to make international contacts are to participate in trade shows and trade mis- sions. In a trade mission, a U.S. government official takes a small group of business owners to dif- ferent foreign countries in order to help establish relationships and promote exporting. There are not a lot of these missions, and they are usually specific to a particular type of business and region of the world, so they are not always appropriate. At an international trade fair, similar to domestic trade fairs, you have a booth displaying your products or services and the opportunity for exposure to thousands of potential clients. Again, some fairs are industry-specific, while others are more general. The U.S. government often has a U.S. pavilion featuring export-oriented companies. These companies often have the opportunity to tie into other U.S. government services such as meeting with local U.S. embassy officials, prearranged meetings with qualified customers, market research information, trade barrier information, transportation and customs information, and assistance and access to U.S. trade show experts. Even if you can’t exhibit in the fair, attending the fair may give you a chance to meet the sort of people you need to know.

The U.S. government through www.export.gov also provides such services as printed and video catalogs, online databases, and personalized (fee-based) contact services. The U.S. Commercial Service will also assist a company in arranging private promotional activities, including exhibitions, press releases, and receptions when appropriate.

Still another way is to look for foreign companies with a resident representative in the United States, a type of private importing agent. Often these representatives are interested in bringing U.S. products back to their home countries and will already have a good idea if your product is right, and how to promote and distribute it.30 To find these resident representatives, try a Google search with the terms “resident representative” US, importing-site:.gov.

The next step is to export your products. But there are a few other things to consider first. Pricing becomes complicated as you need to cover transportation, the additional documents you may need,

possible tariffs (taxes on incoming goods), potential currency valuation changes, the cost of convert- ing currencies, and the additional packaging necessary to ship abroad. The importer usually covers foreign taxes, tariffs, additional shipping charges, port handling fees, and the like, but this must be carefully spelled out in your contracts in order to avoid potential differences of opinion.

Shipping documentation and other paperwork are very specific to the product and the country to which it is going. The International Trade Administration (www.ita.doc.gov) provides extensive information about tariffs, taxes, specific country information, and other general exporting informa- tion. The U.S. Country Commercial guides also provide some assistance in this area, as do some country government websites. The Bureau of Export Administration (www.bxa.doc.gov) provides information about when export licensing is necessary and also information on exporting of politi- cally sensitive products. In addition, companies such as NetShip (www.netship.net) have arisen specifically to handle shipping and documentation issues for e-commerce.31

There are a variety of payment procedures available. The easiest for you is to require up-front cash payment prior to shipment (or credit card if appropriate). This eliminates your risk, but puts the customer at risk. Providing credit to your customers reverses the risk, and puts it all on you. Both of these are possible methods of receiving payments, but less often used. More typical meth- ods include letters of credit or documentary drafts. In both cases, the payment procedure now includes four parties—you, your customer, and both of your banks—and payments are made upon proper presentation of certain documents, including the letter of credit or draft, bills of lading, and other paperwork. Although the system is somewhat complex, it provides a lower level of risk for all parties than cash in advance or an open account. You can find assistance about these methods at your current bank.

Financing and insurance become important because of the length of time it may take for interna- tional payments to be processed and the risk of default, as well as the difficulty of recovery in case of default in international transactions. The Small Business Administration (www.sba.gov), the Ex-Im Bank (www.exim.gov), and the Overseas Private Investment Corporation (www.opic.gov) provide loans and insurance to cover exporting. In some cases, these loans may also be used to finance trade show participation, to translate brochures and catalogs for international distribution, to renovate or expand existing facilities necessary to produce products for export, to set up lines of credit for potential customers, to provide export working capital, and to provide funding for developing an export program.

Last is the consideration of conflict resolution. Although the possibility exists for pirating, prod- uct misuse, and other unfortunate occurrences, the primary areas for conflict resolution include nonpayment and contract default issues. There is no universal court of law that can handle these situations. The U.S. Department of Commerce can provide advice and offer reputable local coun- sel, but only for sizable losses, typically several thousand dollars or more. The U.S. Council of the International Chamber of Commerce (www.iccwbo.org) provides international arbitration services and offers some other suggestions, but arbitration, too, is costly and probably not worthwhile un- less the loss is significant. This difficulty in international dispute resolution underscores the need to carefully select partners and to do a thorough job of prescreening. This is an area in which various government agencies can help you. The U.S. Commerce Department, for example, prequalifies potential customers in many cases prior to recommending them; you should check the particular program specifics to verify. Ex-Im Bank provides credit information on potential customers and, as mentioned earlier, many agencies provide insurance for export payments.

Importing

Importing strategy is similar to exporting, but with the buyers and sellers reversed. Instead of cus- tomers to buy your products, you are looking for sources to sell products to you (which, of course, you’ll eventually resell). If you have the opportunity to travel abroad, look for products that are selling well in the country you’re visiting and aren’t available in the United States or products that are considerably cheaper than similar ones found in the United States (labor and manufacturing costs are often cheaper in other countries than the United States). Trade mission and domestic and international trade shows are also good sources. If you can’t travel, ask your international contacts for this information. Next, find out who manufactures them and write the manufacturer a letter, introducing yourself and your company and the potential you see in your market for its product. You’re selling yourself, so be sure to tell the producer why you are the best person or company to be representing the product (i.e., experience in that product or in importing, contacts and distribution systems already in place, familiarity with the market, etc.). International mail can be painfully slow, so a fax or e-mail letter is probably best. Also, avoid slang terms (e.g. “your product is da bomb!”) and idiomatic expressions (like “break the ice”) that are likely to be misunderstood. Since English is rapidly becoming the language of business, a translation is usually not necessary. Follow up with a phone call or visit in which you can pitch the specifics of your marketing plan for the product.32 One way to conduct international calls for free is to register for Skype, an Internet service which lets you use a broadband connected computer to call other Skype users for free (www.skype.com). If you and the overseas company both use Skype, having long conversations to get an understanding of each other will not pose a financial problem. Along the same lines, it is worthwhile these days to check to find out whether an overseas company has video capabilities. Video cameras for PCs are inexpensive, and videoconferencing services are often available on campuses or at commercial locations such as FedEx Kinko’s for low costs.

With importing, many of the paperwork and insurance details will be your source’s responsibil- ity. Import buying works the same way as export selling, that is, the same sorts of paperwork and procedures are followed only in reverse.

Concluding Thoughts on International Business

One of the major mistakes commonly made by U.S. businesspeople (entrepreneurs or major compa- nies) is being insensitive to cultural differences. You’re likely to make some mistakes, but take time to learn at least the basics about the culture you’re dealing with to avoid the biggest errors. Travel guides and U.S. government country reports often offer brief cultural assistance as do books such as Kiss, Bow or Shake Hands and a plethora of “doing business in ———” guides.33

Although international business might seem a little daunting with all the paperwork and regula- tions, small businesses just like yours do it every day. There’s a lot of free or very inexpensive help out there; make use of it.

Location

When you ask real estate agents the best three things to look for in a house, they will tell you, “Loca- tion, location, location.” The same holds true in your business. What location—in particular, good location—means for your business is highly dependent on what your business is, the amount of money you can afford to budget for it, your particular business philosophy, and the marketing niche you are seeking. Let’s start with some general information about location, then move onto specific issues for services (including retailing) and manufacturing businesses. We then discuss some spe- cific choices such as site selection and layout and the buy, build, or lease option.

The first choice, and often only choice, for many entrepreneurs is their hometown because it offers convenience and a familiar setting, and it eliminates a lot of possible family issues. There may also be valid business reasons for this choice: The local banker knows you and is more likely to loan you money; you know your market—the potential customers in the area—and understand their wants and needs; you have seen an unmet need that you can fill; and, for many entrepreneurs, friends and family (usually local) are often the first customers and are great at spreading the word about your business. (Remember that word-of-mouth is often the first method of getting to your customers.)

There may also be some compelling reasons to consider a different location. What are the busi- ness laws like in your area? Local zoning ordinances specify what sorts of businesses are allowed and not allowed in specific locations.34 Certain types of businesses—usually those deemed hazard- ous or that produce foul odors—may be banned or severely restricted. State and local pollution standards, worker’s compensation, wage rates, and other such legislation might increase the cost of doing business to the point that other locations become much more favorable. State and local taxes in particular vary considerably from state to state. For example, Wyoming has no personal or corpo- rate income tax, while California has relatively high rates. On the other hand, certain locations often offer attractive incentives for new businesses ranging from tax credits to low-interest loans, from favorable business laws to business incubators (discussed later). Most of this information can be found on the Internet. Try the state or city business development office (a good place to start is the Federation of Tax Administrators’ state list at www.taxadmin .org/fta/rate/tax_stru.html) or the local chambers of commerce (look in the phone book or at www.uschamber.com/chambers/directory/default to find your local Chamber affiliate). There is also information by state available for your state at business.USA.gov, and the Small Business Ad- ministration offers links to state-based resources at www.sba.gov/category/navigation-structure/ counseling-training. Site Selection Magazine’s website (www.siteselection.com) has a number of tools that can help you find the right location. Many of these require being a registered user, but registration is free.

Other reasons to consider other locations are tied to your customer. Your hometown may not be the best place for you to find your target market customers. Are you close to the people who will use your product or service? Other considerations include population growth or decline (especially in your target sector), income levels, and predicted increases or decreases in income. Is the location expanding economically or slowly dying? Perhaps the best source for this infor- mation is the US Census Bureau. State and local municipality business development offices may also carry such information, but they are likely to be slanted toward attracting new businesses. Being positioned to benefit your customer can also be key. Zappos’s primary distribution hub was placed in Louisville, Kentucky, to be close to a major UPS air cargo hub in order to speed delivery.

Also consider the type of business you are planning. Do you need skilled labor? If so, what areas will provide you with the necessary employees? Do you need to be near raw materials or particular methods of transportation? These issues will help determine your choices. Where are your competitors? Certain industries tend to be clustered in certain regions where they can make efficient use of services and employees. Think of California’s Silicon Valley or the financial district of New York City.

Doing business in your hometown may be perfectly appropriate; however, the cost of moving a company—whether across town or across the country—can be very expensive. It pays to plan ahead.

Service Firms

There are three typical locations for services: at the client’s location, at a mutually accessible loca- tion, and at your firm’s location. Traditionally, services may have been tied to one or another of these, but marketing niches have been carved out by people daring to be different. Typically, dry cleaning and restaurant dining are services provided at a place accessible to both parties, but some dry cleaners now offer pick up and delivery from the client’s home, and not only pizza restaurants offer delivery these days. Thanks to the Internet, video rental like Netflix.com and other services are handled electronically, and the customer and service provider may never meet face to face. Whatever innovative niche you select, there are a few things to keep in mind.

At the Client’s Location

Typically, these services include things such as house or office cleaning, pest control, remodeling, lawn and gardening services, carpet cleaning, and similar services which must be performed at the client’s location. Business headquarters can be a home office with enough room to store and maintain any necessary equipment used in the service. Reliable transportation, preferably modified to organize and store tools efficiently, is imperative. More importantly, the range of your client’s locations must be planned to prevent transportation times from being unmanageable. For example, facing a one-hour drive to a client’s location might mean you have tied up two hours in commuting. If you cannot charge for travel and do not have other clients nearby, it means you have two hours in which you cannot make any money that day.

If you’ve done your homework carefully, you already know the geographic area(s) most likely to use your service. Certain services may be organized into a rotating schedule. For example, a house cleaning service may clean a certain set of neighborhoods on Monday, different set on Tuesday, and so on. In other cases, more remote clients may be charged a transportation fee. In some cases, a mile- age fee may be appropriate for your business (delivery services, for example).

As the firm grows, it may outgrow its home-based headquarters. As your clients seldom, if ever, visit you, you have more latitude in where you can be located and the ability to seek out low-cost space (see site selection section below). Reasonable distance to the clients and adequate storage room for your expanded fleet and equipment are key to choosing a site.

Mutually Accessible Location

Services using this approach often have too much specialized equipment to be readily transported and a need for at least some client involvement. Barbershops, dentist offices, video rental stores, and restaurants are services typically located at a site that is extremely convenient for the client and reasonably so for the owner and employees.

Even though your service may be traditionally located in a mutually accessible area, consider what you might do to make it home-based (see Chapter 5). Your watch repair shop might generate clientele by being located in a shopping center, but will the added sales be offset by the high cost of rent, utilities, insurance, and other payments? Can you offer pickup and delivery and do the work at

home? Your restaurant idea might work as a catering service. Instead of a specialized clothing shop, why not try mail order or Internet-based sales?

1. According to this chapter, what other steps in the channels of distribution are available between the manufacturer and the consumer or industrial buyer (Figure 11.1)?

2. According to this chapter, what are three key considerations in determining the location of your business?

3. According to this chapter, what are the typical locations for service businesses?

4. What are the advantages and disadvantages of buying, building or leasing your business’ facility?

Manufacturers profit per sale FIGURE 11.1 $ 5 Manufacturer $ 5 Manufacturer $ 5 Manufacturer $ 10 10 Consumer 20 Retailer 40Consumer Wholesaler Typical Distribution Channels Retailer 5 Manufacturer S10 Agent $20 Wholesaler30 Retailer $40 Consumer Wholesaler Wholesaler $ 5 Manufacturerii, Agent-- --? Industrial Buyer $35 Manufacturer $35 Manufacturer$40Industrial Buyer Consumer $ 5 to mak $ 40 manufacturers suggested retail price

Explanation / Answer

1) Channels of Distribution :

a)Distribution/ Intermediaries

b) Direct sales /Direct Marketing

c) Word of Mouth

d)Direct Mail

e)Telemarketing

f)Response Advertising

g)Internet Advertising

h)Guerilla marketing -Use of creative and inexpensive ways to reach the customer

i)Multi-Channel Marketing

2) Three key considerations in determining the location of your business.

a)Type of Busines, b)Customer Location c)the amount of money you can afford to budget for it

Locate your business where your customers are there.("No customers = no business")It is suitable for a restaurant business or any other grocery store.But if your business relies on frequent deliveries.Then, it’s important to consider local transport links, particularly main roads and highways.A good location for your business is highly dependent on what your business you are in.

3.Typical Locations for service business

There are three typical locations for services

a) the client’s location

b)mutually accessible location

c) firm’s location.  

4)Advantages and Disadvantages of buying, building or leasing your business facility

The benefit of buying your space is that it becomes an asset you own and its face value increase over long term. But leasing has its own benefits which offers you flexibility.After a certain period, your restaurant will be booming with profits.But the owner of the restaurant wouldn't extend your lease and ask you to move out.He will gain the business you set up at that place.Both options have the advantages and disadvantages, it's upon us which is suitable for us.Another option of building, it offers you more flexibility in building your offices spaces but at the same time it will consume time and would take considerable time to be ready

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