Business Rx: Advertising advice, revenue prediction and other sweet stuff

December 2, 2012

Elana Fine, managing director of the Dingman Center for Entrepreneurship at the University of Maryland’s Robert H. Smith School of Business, took questions from readers recently. Here are excerpts:

Advertising support

Q.How do you think small businesses should use advertising to help sales? What are new and efficient opportunities?

Elana Fine: Depending on your business, online advertising can be an inexpensive and somewhat effective tool to build brand awareness to a target group of customers. Advertising platforms are sophisticated in their ability to use customer behavior for ad placement. However, you get what you pay for — you are still focused on customers that might not be looking for the product you are selling. Small businesses might be better served by lead generation platforms that might better connect you with potential customers, even though you may have to give them a higher percentage of your revenue. If you are brick and mortar — focus on promotions that will drive foot traffic.

Future Revenue

Q.I am looking to open a small restaurant, and I am looking to consider my revenue before I can decide what costs I can incur. How should I calculate anticipated revenue for my restaurant?

Elana Fine: This is a tough one to answer in just a few sentences as it really depends on a number of factors. Start building your model based on expected traffic, expected revenue per customer based on price points (is this fast food or sit-down, low-end or high-end?), throughput of customers per meal (are you open for breakfast, lunch or dinner? etc.) You also need to forecast how long it will take for traffic to ramp up and how much it will cost to drive traffic. Also, think through the mix of new customers and repeat ones. Is this something people will eat once a week or once a month? You also need to think through the ongoing expenses — once you build out the space, you’ll still have food expense, which can be costly. Since you can’t store most food inventory for very long, you have to figure out a sophisticated approach to forecasting demand. So ... you have a lot of questions to ask yourself.

Hot industries

Q.I want to start a business but not sure in what industry — my passion is sweets (candy/cupcakes/chocolate), but not sure if this can be profitable enough to sustain. Any suggestions?

Elana Fine: There are certainly a lot of options out there for sweet tooths — so clearly there is a business model to be found. The issue will be finding a niche for yourself among the many cupcake companies. The takeaway from the proliferation of cupcake and hamburger chains has been that people are willing to pay for high-end treats. If we are going to eat “unhealthy,” we want to do it right. This is also part of an experience — so creating a unique experience for buying candy, cupcakes, chocolate or all three is part of the model just as much as the products themselves. Look at what has been successful among brands like Georgetown Cupcake, Pinkberry and Elevation Burger. and think about what they have done well and where there might be additional opportunities that their current product lines don’t address.

Re: Hot industries

Q.It would seem to me that the answer is almost right in front of this writer: If you want to have a sweets shop, you really need to get into some bakery that specializes in this to get the inside experience of how this business runs (i.e., store size, ingredients order, recipe development, etc.).

Elana Fine: Yes, get smart and educate yourself. Learning from others’ successes and mistakes is better, faster and cheaper than learning from your own.

Health care PR

Q.How much of my savings should I put up for starting a solo PR agency serving medical, dental and other health care professionals? I can’t borrow because of an ongoing foreclosure. I have savings, but I’m not sure how much to tap.

Elana Fine: Before investing your entire nest egg, think about how you can test the market for your services. Talk to health care professionals first and understand their current demand, how much they will be willing to pay for a retainer and what kind of pilot arrangement they’d be willing to commit to. Understand your competition — are they using other providers (which would require switching costs) or are they not engaging any providers (which might mean a longer sales cycle because they don’t have a budget)? Try to forecast when you might line up some initial paying clients and when you will have enough for the business to be sustainable. If you don’t have enough runway in your savings, you may need to think about initially consulting as part of a group or on the side before you fully commit.

Funding

Q.For tech start-ups, what are your thoughts on raising seed funding via crowdfunding (i.e., Kickstarter)? Will this scare away formal forms of financing down the road (e.g., venture capital)? If so, how should entrepreneurs address that?

Elana Fine: VC firms will need to be open minded about crowdsourced funding because of its increasing popularity on sites such as Angel List. These sites also give VCs insight into deal flow and help build future pipeline of early stage deals. Entrepreneurs do need to be aware of their capitalization and careful about having too many small investors that might cause problems in later rounds. I think crowdfunding can be a helpful substitute to a friends and family round—to help fund development so you can test the market. Beyond that, I think it is important to really know your investors and what they can bring to the table in exchange for equity. Angel investing is very risky even for the most sophisticated investors, so the diligence really needs to go both ways.

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