CH-6-10 Assessment of Entrepreneurial Opportunities – Entrepreneurship: Theory, Process, and Practice: Chapter Notes

This Document Contains Chapters 6 to 10 CHAPTER 6 ASSESSMENT OF ENTREPRENEURIAL OPPORTUNITIES CHAPTER OUTLINE I. The Challenge of New-Venture Start-Ups II. Pitfalls in Selecting New Ventures A. Lack of Objective Evaluation B. No Real Insight into the Market C. Inadequate Understanding of Technical Requirements D. Poor Financial Understanding E. Lack of Venture Uniqueness F. Ignorance of Legal Issues III. Critical Factors for New-Venture Development A. Uniqueness B. Investment C. Growth of Sales D. Product Availability E. Customer Availability IV. Why New Ventures Fail V. The Traditional Venture Evaluation Processes A. Profile Analysis Approach B. Feasibility Criteria Approach C. Comprehensive Feasibility Approach 1. TECHNICAL FEASIBILITY 2. MARKETABILITY VI. The Contemporary Methodologies for Venture Evaluation A. The Design Methodology 1. DESIGN AND LEARN 2. DESIGN DEVELOPMENT B. Design-Centered Entrepreneurship C. The Lean Start-up Methodology 1. KEY LEAN START-UP KEY TERMINOLOGY FEATURED CONTENT The Entrepreneurial Process: Facing Your Fears! LEARNING OBJECTIVES 1 To explain the challenge of new-venture start-ups 2 To review common pitfalls in the selection of new-venture ideas 3 To present critical factors involved in new-venture development 4 To examine why new ventures fail 5 To study certain factors that underlie venture success 6 To analyze the traditional venture evaluation process methods: profile analysis, feasibility criteria approach, and comprehensive feasibility method 7 To highlight the contemporary venture evaluation methods: design methodology and the lean start-up methodology CHAPTER SUMMARY The complexity of factors involved in new-venture start-up (as shown in Figure 6.1) makes it difficult to clearly assess and evaluate each one. In addition, the difficulty of obtaining reliable data on failed firms adds to this dilemma. Improvements are being made, however, and new-venture assessment is becoming a stronger process. A number of pitfalls may occur in the selection of a new venture: lack of an objective evaluation of the venture, lack of insight into the market, inadequate understanding of technical requirements, poor financial understanding, lack of venture uniqueness, and failure to be aware of legal issues. When assessing a new venture, an entrepreneur needs to consider several critical factors: the uniqueness of the good or service, the amount of capital investment required to start the venture, the growth of sales, and the availability of the product. Some major reasons new ventures fail are inadequate knowledge of the market, faulty product performance, ineffective marketing and sales effort, inadequate awareness of competitive pressures, rapid product obsolescence, poor timing, and undercapitalization. In drawing together these and other reasons, recent research reveals three major categories of causes for failure: product/market problems, financial difficulties, and managerial problems. In addition, entrepreneurs face internal and external problems. The feasibility of the entrepreneur’s product or service can be assessed by asking the right questions, by making a profile analysis of the venture, and by carrying out a comprehensive feasibility study. LECTURE NOTES I. The Challenge of New-Venture Start-Ups 400,000 new firms have emerged every year since 2010; that works out to approximately 1,100 business start-ups per day. The reasons that entrepreneurs start new ventures are similar to the characteristics discussed in Chapter 3 on the entrepreneurial mind-set: (1) the need for approval (2) the need for independence (3) the need for personal development (4) welfare (philanthropic) considerations (5) perception of wealth (6) tax reduction and indirect benefits (7) following role models II. Pitfalls in Selecting New Ventures Six of the most important pitfalls commonly encountered in the process of selecting a new venture are listed below. Lack of Objective Evaluation •Many entrepreneurs lack objectivity. •All ideas should be subject to rigorous study and investigation. No Real Insight into the Market •Entrepreneurs must project the life cycle of the new product. •Timing of product is critical. Inadequate Understanding of Technical Requirements •Entrepreneurs need to be thorough in studying a new product. •Unexpected technical difficulties frequently pose time-consuming and costly problems. Poor Financial Understanding •Entrepreneurs are sometimes ignorant of costs. •Entrepreneurs are sometimes victims of inadequate research and planning. •Entrepreneurs quite often underestimate development costs by wide margins. Lack of Venture Uniqueness •A new venture should be unique. •Product differentiation is needed to separate product from those of competitors. Ignorance of Legal Issues Business is subject to many legal requirements: •A safe workplace •Reliable and safe products and services •Necessity for trademarks, patents, and copyrights III. Critical Factors for New-Venture Development Five factors are critical during the prestart-up and start-up phases of a new venture: 1) the relative uniqueness of the venture, (2) the relative investment size at start-up, (3) the expected growth of sales and/or profits as the venture moves through its start-up phase, (4) the availability of products during the prestart-up and start-up phases, and (5) the availability of customers during the prestart-up and start-up phases. Uniqueness Range of uniqueness in a new venture can be considerable. Uniqueness is further characterized by the length of time a nonroutine venture will remain nonroutine. Investment Required capital investment can vary considerably. Extent and timing of funds needed is critical. Key questions to ask to determine the amount of funding needed during the start-up phase: •Will industry growth be sufficient to maintain break-even sales to cover a high fixed cost structure during the start-up period? •Do the principal entrepreneurs have access to substantial financial reserves to protect a large initial investment? •Do the entrepreneurs have the appropriate contacts to take advantage of various environmental opportunities? •Do the entrepreneurs have both industry and entrepreneurial track records which justify the financial risk of a large-scale start-up? Growth of Sales Key questions to ask about growth of sales during the start-up phase: •What is the growth pattern anticipated for new-venture sales and profits? •Are sales and profits expected to grow slowly or level off shortly after start-up? •Are large profits expected at some point with only small or moderate sales growth? •Are both high sales growth and high profit growth likely? •Will there be limited initial profits with eventual high-profit growth over a multiyear period? In answering these questions, it is important to remember that most ventures fit into one of the three following venture classifications: •Lifestyle ventures o Independence, autonomy, and control are the primary driving forces. o Sales and profits are deemed to provide a sufficient and comfortable living for the entrepreneur. •Small profitable ventures o Financial considerations play a major role. o Autonomy and ownership control are important factors. •High-growth ventures o Significant sales and profit growth are expected. o May be possible to attract venture capital money. o May be possible to attract funds raised through public or private placements. Product Availability Goods or services must be available. Lack of product availability can affect the company’s image and its bottom line. Customer availability •Risk continuum (two extremes): o Customers willing to pay cash before delivery. o Venture begun not knowing exactly who will buy the product. •Two critical considerations: o How long will it take to determine who the customers are? o What are the customers’ buying habits? IV. Why New Ventures Fail Every year millions of dollars are spent on starting new enterprises, but only a small percentage of new businesses is successful. Most studies have found that the factors underlying the failure of new ventures are within the control of the entrepreneur. Three major categories of causes for failure: product/market problems financial difficulties managerial problems V. The Traditional Venture Evaluation Processes A critical task of starting a new business is conducting solid analysis of the feasibility of the product/service in getting off the ground. Profile Analysis Approach Different variables, which enable the entrepreneur to judge the potential of the business, need to be investigated before the new idea is put into practice. An internal profile analysis (provided as an experiential exercise at the end of the chapter) takes a checklist approach, allowing entrepreneurs to identify major strengths and weaknesses of a new venture, and can be used to assess the financial, marketing, organizational, and human resources aspects of the new venture. Feasibility Criteria Approach Key questions to ask: •Is it proprietary? Should permit a long head start against competitors. Should permit a period of extraordinary profits early to offset start-up costs. •Are the initial production costs realistic? Most estimates are too low. Careful detailed analysis should be made. •Are the initial marketing costs realistic? Identify target markets. Identify market channels. Identify promotion strategy. •Does the product have potential for very high margins? A necessity for a fledgling company Gross margins are important. •Is the time required to get to market and to reach break-even realistic? The faster, the better. An error here can spell trouble later on. •Is the potential market large? Must look three to five years into the future Market needs time to emerge. •Is the product the first of a growing family? •Does an initial customer exist? •Are the development costs and calendar times realistic? Preferably, they are zero. A ready-to-go product gives the venture a big advantage over competitors. •Is this a growing industry? •Can the product—and the need for it—be understood by the financial community? Comprehensive Feasibility Approach Incorporates external factors in addition to those included in the criteria questions cited above and looks at technical, market, financial, organizational, and competitive factors. . Technical feasibility and marketability merit special attention. TECHNICAL FEASIBILITY •Functional design of the product and attractiveness in appearance •Flexibility for ready modification •Durability of the materials from which the product is made •Reliability •Product safety •Reasonable utility •Ease and low cost of maintenance •Standardization •Ease of processing or manufacture •Ease in handling and use MARKETABILITY Three major areas involved: (1) investigating the full market potential and identifying customers (or users) for the goods or service, (2) analyzing the extent to which the enterprise might exploit this potential market, and (3) using market analysis to determine the opportunities and risk. General information sources to consider: •General economic trends •Market data •Pricing data •Competitive data VI. The Contemporary Methodologies for Venture Evaluation With newer movements taking shape in the everchanging entrepreneurial world such as design methods to lean start-up procedures, the fast paced entrepreneurial environment is demonstrating newer methods to enhance venture concepts through development. The Design Methodology Demand for design is becoming so great that universities are now building programs to approach design rather than concentrating it in just technical schools. DESIGN DEVELOPMENT Utilizes skills we all possess but are generally ignored due to more conventional problem solving practices. Takes the initial concept idea and develops a proof of concept that elicits feedback from relevant stakeholders. •Proof of Concept Feasibility •Proof of Concept Desirability •Proof of Concept Viability Design-Centered Entrepreneurship The entrepreneur applies design methods in four action stages of developing an opportunity. •Ideation •Prototyping •Market engagement •Business model The Lean Start-up Methodology Provides a scientific approach to creating early venture concepts and delivers a desired product to customer’s hands faster. This methodology is hypothesis-driven, and entrepreneurs must work to gather and incorporate customer feedback early and often. KEY LEAN START-UP KEY TERMINOLOGY The Three A’s of Matrics: •Actionable •Accessible •Auditable Pivot Build-Measure-Learn Feedback Loop Validated Learning CHAPTER 7 PATHWAYS TO ENTREPRENEURIAL VENTURES CHAPTER OUTLINE I. Creating New Ventures A. New-New Approach to Creating New Ventures B. New-Old Approach to Creating New Ventures C. Examining the Financial Picture When Creating New Ventures II. Acquiring an Established Entrepreneurial Venture A. Personal Preferences B. Examination of Opportunities B. Advantages of Acquiring an Ongoing Venture 1. LESS FEAR ABOUT SUCCESSFUL FUTURE OPERATION 2. REDUCED TIME AND EFFORT 3. A GOOD PRICE C. Evaluation of the Selected Venture D. Key Questions to Ask 1. WHY IS THE BUSINESS BEING SOLD? 2. WHAT IS THE CURRENT PHYSICAL CONDITION OF THE BUSINESS? 3. WHAT IS THE CONDITION OF THE INVENTORY? 4. WHAT IS THE STATE OF THE COMPANY’S OTHER ASSETS? 5. HOW MANY OF THE EMPLOYEES WILL REMAIN? 6. WHAT TYPE OF COMPETITION DOES THE BUSINESS FACE? 7. WHAT DOES THE FIRM’S FINANCIAL PICTURE LOOK LIKE? E. Negotiating the Deal III. Franchising: The Hybrid A. How Franchising Works B. Advantages of Franchising 1. TRAINING AND GUIDANCE 2. BRAND-NAME APPEAL 3. A PROVEN TRACK RECORD 4. FINANCIAL ASSISTANCE C. Disadvantages of Franchising 1. FRANCHISE FEES 2. FRANCHISOR CONTROL 3. UNFULFILLED PROMISES D. Franchise Law E. Evaluating Franchising Opportunities 1. LEARNING OF FRANCHISING OPPORTUNITIES 2. INVESTIGATE THE FRANCHISOR 3. SEEKING PROFESSIONAL HELP 4. MAKING THE DECISION: IT’S UP TO THE ENTREPRENEUR FEATURED CONTENT The Entrepreneurial Process: To Franchise or Not to Franchise, That Is the Question The Entrepreneurial Process: The Franchise Disclosure Document LEARNING OBJECTIVES 1 To describe the major pathways and structures for entrepreneurial ventures 2 To present the factors involved in creating a new venture 3 To identify and discuss the elements involved in acquiring an established venture 4 To outline ten key questions to ask when buying an ongoing venture 5 To examine the underlying issues involved in the acquisition process 6 To define a franchise and outline its structure 7 To examine the benefits and drawbacks of franchising 8 To present the franchise disclosure document (FDD) as a key item in franchises CHAPTER SUMMARY The easiest and best way to approach a new business venture is to design a unique product or service. Sometimes this involves what is called a new-new approach— that is, the development of an entirely new idea for a product or service, as was the case with Zynga and Google. In most instances, however, the prospective owner-manager must be content to use a new-old approach by “piggybacking” on someone else’s ideas. This involves either expanding on what the competition is doing or offering a product or service in an area where it is not presently available. On the financial side, the prospective owner-manager needs to examine the enterprise’s financial picture and to determine the costs of setting up the operation and the amount of revenue that will be generated during the initial period. Finally, the prospective owner-manager must review a series of other operational considerations ranging from the building, merchandise, and equipment needed for operations to record keeping, insurance, legal, marketing, and personal matters. Another opportunity is the purchase of an existing successful firm. It has a number of advantages. Three of the most important are that its successful future operation is likely, the time and effort associated with starting a new enterprise are eliminated, and a bargain price may be possible. Before deciding whether to buy, however, the prospective owner needs to ask and answer a series of “right questions,” Some of these follow: Why is the business being sold? What is the physical condition of the business? What is the condition of the inventory? What is the state of the company’s other assets? How many of the employees will remain? What competition does the business face? What is the firm’s financial picture? After all questions have been answered satisfactorily, the prospective buyer must negotiate for the business. In the final analysis, however, the prospective owner should be concerned with buying the company’s assets at market value and then paying something for goodwill if it is deemed an asset. Valuation is discussed further in Chapter 14. LECTURE NOTES I. Creating New Ventures Every prospective entrepreneur wants to know the best method for getting a new business started. New-New Approach to Creating New Ventures The most effective way to start a new business is via the introduction of new products or services into a market. Most business ideas for new ventures come from one’s experience, such as prior jobs, hobbies or interests, and personally identified problems. New-Old Approach to Creating New Ventures Most small ventures do not start with a totally unique idea. Instead, they often “piggyback” on someone else’s idea by either improving a product or offering a service in an area where it is not currently available. Examining the Financial Picture When Creating New Ventures The worst thing an entrepreneur can do is adopt an “all or nothing” strategy to creating a new venture. The entrepreneur must consider the enterprise’s financial picture. Consideration of start-up and monthly expenses is a must. The entrepreneur must be concerned with upside gain and downside loss (the profits the business can make and the losses it can suffer). The entrepreneur must gain an adequate return on the amount of money risked. II. Acquiring an Established Entrepreneurial Venture Prospective entrepreneurs may elect to purchase an existing business rather than start one, but purchasing a business venture is a complex process. Personal Preferences Entrepreneurs need to limit their choices of ventures to buy by recognizing certain personal factors: background, skills, interests, and experience all factors that should be weighed in selecting the type of business to buy. Examination of Opportunities Business brokers, newspaper ads, trade sources, and professional sources can all be sources of information for possible businesses to buy. Advantages of Acquiring an Ongoing Venture Three of the most important advantages of acquiring an ongoing venture are discussed below. LESS FEAR ABOUT SUCCESSFUL FUTURE OPERATION A successful business has already proved that it has the ability to attract customers and control costs. REDUCED TIME AND EFFORT An ongoing enterprise has already assembled the inventory, equipment, personnel and facilities to run it. An ongoing enterprise has already established relationships with suppliers, bankers, and other businesspeople. A GOOD PRICE It may be possible to purchase on ongoing venture at a very good price. Evaluation of the Selected Venture Specific factors can be useful in evaluating the venture being offered, such as the local environment of the business, its location, profit potential, and tangible and intangible business assets. Key Questions to Ask Asking the right questions is critical. WHY IS THE BUSINESS BEING SOLD? WHAT IS THE CURRENT PHYSICAL CONDITION OF THE BUSINESS? WHAT IS THE CONDITION OF THE INVENTORY? WHAT IS THE STATE OF THE COMPANY’S OTHER ASSETS? HOW MANY OF THE EMPLOYEES WILL REMAIN? WHAT TYPE OF COMPETITION DOES THE BUSINESS FACE? WHAT DOES THE FIRM’S FINANCIAL PICTURE LOOK LIKE? Negotiating the Deal The potential buyer must negotiate the final deal. Information, time, pressure, and alternatives are all factors that should be considered in the negotiations. Without reliable information, the buyer is at a disadvantage; having more time to make the deal is an advantage to that party; pressure from other owners can influence the deal; and a lack of alternatives in whether to make the deal can conclude negotiations quickly. III. Franchising: The Hybrid A franchise is any arrangement in which the owner of a trademark, trade name, or copyright has licensed others to use it in selling goods or services. A franchisee is the purchaser of a franchise, and a franchisor is the seller of the franchise. How Franchising Works The franchisee usually contracts for the following business package: •Make a financial investment in the operation •Obtain and maintain a standardized inventory and/or equipment package •Maintain a specified quality of performance •A franchise fee •Engage in a continuing business relationship The franchisor usually provides: •The company name •Symbols, logos, designs, and facilities •Professional management training •Sale of specific merchandise necessary for the unit’s operations at wholesale prices •Financial assistance •Continuing aid and guidance Advantages of Franchising TRAINING AND GUIDANCE BRAND-NAME APPEAL A PROVEN TRACK RECORD FINANCIAL ASSISTANCE Disadvantages of Franchising FRANCHISE FEES—It is not uncommon to be faced with fees of $50,000 to $1,000,000. FRANCHISOR CONTROL—The franchisor generally exercises a fair amount of control over the operation in order to maintain a degree of uniformity. UNFULFILLED PROMISES—In some cases, especially among less-known franchisors, the franchisees have not received all they were promised. Franchise Law The courts tend to apply general common-law principles and appropriate federal or state statutory definitions and rules, due to the absence of case law on franchises. Termination provisions of franchise contracts normally favor the franchisors. Evaluating Franchising Opportunities Activities that potential franchisees perform: LEARNING OF FRANCHISING OPPORTUNITIES INVESTIGATING THE FRANCHISOR SEEKING PROFESSIONAL HELP MARKING THE DECISION: IT’S UP TO THE ENTREPRENEUR CHAPTER 8 SOURCES OF CAPITAL FOR ENTREPRENEURS CHAPTER OUTLINE I. The Search for Capital II. Debt versus Equity Financing A. Debt Financing 1. COMMERCIAL BANKS 2. PEER-TO-PEER LENDING (P2P) 3. OTHER DEBT-FINANCING SOURCES B. Equity Financing 1. PUBLIC OFFERINGS 2. PRIVATE PLACEMENTS III. The Venture Capital Market A. Recent Developments in Venture Capital B. Dispelling Venture Capital Myths 1. MYTH 1: VENTURE CAPITAL FIRMS WANT TO OWN CONTROL OF YOUR COMPANY AND TELL YOU HOW TO RUN THE BUSINESS 2. MYTH 2: VENTURE CAPITALISTS ARE SATISFIED WITH A REASONABLE RETURN ON INVESTMENTS 3. MYTH 3: VENTURE CAPITALISTS ARE QUICK TO INVEST 4. MYTH 4: VENTURE CAPITALISTS ARE INTERESTED IN BACKING NEW IDEAS OR HIGH-TECHNOLOGY INVENTIONS—MANAGEMENT IS A SECONDARY CONSIDERATION 5. MYTH 5: VENTURE CAPITALISTS NEED ONLY BASIC SUMMARY INFORMATION BEFORE THEY MAKE AN INVESTMENT C. Venture Capitalists’ Objectives D. Criteria for Evaluating New-Venture Proposals 1. STAGE 1: INITIAL SCREENING 2. STAGE 2: EVALUATION OF THE BUSINESS PLAN 3. STAGE 3: ORAL PRESENTATION 4. STAGE 4: FINAL EVALUATION E. Evaluating the Venture Capitalist IV. Informal Risk Capital: Angel Financing A. Types of Angel Investors FEATURED CONTENT The Entrepreneurial Process: Bootstrapping: The Art of Doing More with Less The Entrepreneurial Process: Venture Capitalists’ Due Diligence “Deal Killers” LEARNING OBJECTIVES 1 To differentiate between debt and equity as methods of financing 2 To examine commercial loans and social lending as sources of capital 3 To review initial public offerings (IPOs) as a source of capital 4 To discuss private placements as an opportunity for equity capital 5 To study the market for venture capital and to review venture capitalists’ evaluation criteria for new ventures 6 To discuss the importance of evaluating venture capitalists for a proper selection 7 To examine the existing informal risk-capital market (“angel capital”) CHAPTER SUMMARY This chapter has examined the various forms of capital formation for entrepreneurs. Initial consideration was given to debt and equity financing in the form of commercial banks, trade credit, accounts receivable financing, factoring and finance companies, and various forms of equity instruments. Public stock offerings have advantages and disadvantages as a source of equity capital. Although large amounts of money can be raised in short periods of time, the entrepreneur must sacrifice a degree of control and ownership. In addition, the Securities and Exchange Commission has myriad requirements and regulations that must be followed. Private placements are an alternative means of raising equity capital for new ventures. This source is often available to entrepreneurs who seek venture capital in amounts of less than $500,000, although it is possible that up to $5 million could be raised with no more than 35 nonaccredited purchasers. The SEC’s Regulation D clearly outlines the exemptions and requirements involved in a private placement. This placement’s greatest advantage to the entrepreneur is limited company disclosure and only a small number of shareholders. In recent years, the venture capital market has grown dramatically. Billions of dollars are now invested annually to seed new ventures or help fledgling enterprises grow. The individuals who invest these funds are known as venture capitalists (VCs). A number of myths that have sprung up about these capitalists were discussed and refuted. VCs use a number of different criteria when evaluating new-venture proposals. In the main, these criteria focus on two areas: the entrepreneur and the investment potential of the venture. The evaluation process typically involves four stages: initial screening, business plan evaluation, oral presentation, and final evaluation. In recent years, informal risk capital has begun to play an important role in new-venture financing. Everyone with money to invest in new ventures can be considered a source for this type of capital. Some estimates put the informal risk capital pool at more than $5 billion. Entrepreneurs who are unable to secure financing through banks or through public or private stock offerings typically will turn to the informal risk capital market by seeking out friends, associates, and other contacts who may have (or know of someone who has) money to invest in a new venture. LECTURE NOTES I. The Search for Capital Every entrepreneur faces the challenge of finding start-up capital. There are numerous possibilities and combinations of financial packages that may be appropriate for a business. II. Debt versus Equity Financing The use of debt to finance a new venture requires a payback of funds plus a fee, whereas equity financing involves the sale of some of the ownership in the venture. Debt Financing Debt financing is popular for short term borrowing (one year or less) for working capital and for long term borrowing (one to five years or more) for the purchase of property or equipment. COMMERCIAL BANKS Advantages of Debt Financing •No relinquishment of ownership. •More borrowing allows for potentially greater return on investment. •During periods of low interest rates opportunity cost is justified. Disadvantages of Debt Financing •Regular (monthly) interest payments are required. •Cash-flow problems can intensify because of payback responsibilities. •Heavy use of debt can inhibit growth and development. PEER-TO-PEER LENDING (P2P) Peer-to-peer (P2P) lending is the practice of lending money to unrelated individuals, or “peers,” without going through a bank or other traditional financial institution. Social lenders, often Internet-based sites, pool money from investors willing to lend capital at agreed-upon rates. The average size of social loans is around $7,000, with maximums of $25,000. Once thought of as an alternative funding option only for entrepreneurs unable to qualify for commercial loans, P2P lending is beginning to attract borrowers among established entrepreneurs seeking quick capital without the administrative overhead of traditional lenders. OTHER DEBT-FINANCING SOURCES Trade credit—Given by suppliers who sell goods on account; must be paid in 30 to 90 days. Accounts receivable financing—Short-term financing; requires collateral. Factoring—Sale of accounts receivable. Finance companies—Asset-based lenders that lend money against assets such as inventories, accounts receivable, and equipment Equity Financing Requires sharing ownership and profit with the funding source. PUBLIC OFFERINGS Advantages of public offerings: •Size of capital amount •Liquidity •Value •Image Disadvantages of public offerings •Costs •Disclosure •Requirements •Shareholder pressure PRIVATE PLACEMENTS Regulation D eased reports required for selling stock •Rule 504-placements up to $1 million •Rule 505-placements of up to $5 million •Rule 506-placements in excess of $5 million Crowdfunding is a practice that seeks funding for a venture by raising monetary contributions from a large number of people, typically the internet. III. The Venture Capital Market Venture capitalists, experienced professionals, provide the following services: •Capital for start-ups and expansion •Market research for marketing department •Management consulting •Contact with prospective people •Assistance in negotiating •Help in establishing management and accounting controls •Help in employee recruitment and development •Help in risk management and establishing insurance •Counseling and guidance Recent Developments in Venture Capital Following a five-year upward trend from 2004 to 2008, the global economic downturn in 2008 caused a major constriction in activity. VCs are far more inclined to investments in later-stage companies, not start-ups or early-stage venture. Other trends: Pension institutions are now dominant investor class; innovation has become more global and is no longer the exclusive domain of Silicon Valley and Route 128 in Boston; funds are more specialized; syndicated deals are emerging and feeder funds are emerging; small start-up investments are drying up; industry has become more efficient and more responsive to the needs of the entrepreneur because of greater professionalism and greater competition; legal and contractual environment is more sophisticated. Dispelling Venture Capital Myths People have mistaken ideas about the role and function of venture capitalists. MYTH 1: VENTURE CAPITAL FIRMS WANT TO OWN CONTROL OF YOUR COMPANY AND TELL YOU HOW TO RUN THE BUSINESS VCs want the entrepreneur and management team to run businesses profitably. MYTH 2: VENTURE CAPITALISTS ARE SATISFIED WITH A REASONABLE RETURN ON INVESTMENTS If there is a high degree of risk, there must be a high return on investment. MYTH 3: VENTURE CAPITALISTS ARE QUICK TO INVEST It takes a long time to raise a venture capital. MYTH 4: VENTURE CAPITALISTS ARE INTERESTED IN BACKING NEW IDEAS OR HIGH-TECHNOLOGY INVENTIONS—MANAGEMENT IS A SECONDARY CONSIDERATION Venture capitalists back only good management. MYTH 5: VENTURE CAPITALISTS NEED ONLY BASIC SUMMARY INFORMATION BEFORE THEY MAKE AN INVESTMENT A detailed organized business plan is a must. Venture Capitalists’ Objectives Concerned with return on investment Measure the product/service and management of a business Criteria for Evaluating New-Venture Proposals STAGE 1: INITIAL SCREENING STAGE 2: EVALUATION OF THE BUSINESS PLAN STAGE 3: ORAL PRESENTATION STAGE 4: FINAL EVALUATION Evaluating the Venture Capitalist •Does the venture capitalist understand the proposal? •Is the individual familiar with the business? •Is the person someone with whom the entrepreneur can work? IV. Informal Risk Capital: Angel Financing Many wealthy people are looking for investment opportunities. They are referred to as business angels or informal risk capitalists. Types of Angel Investors •Corporate angels •Entrepreneurial angels •Enthusiast angels •Micromanagement angels •Professional angels CHAPTER 9 LEGAL CHALLENGES FOR ENTREPRENEURIAL VENTURES CHAPTER OUTLINE I. Intellectual Property Protection: Patents A. Securing a Patent: Basic Rules B. Securing a Patent: The Application II. Intellectual Property Protection: Copyrights A. Understanding Copyright Protection B. Protecting Ideas? III. Intellectual Property Protection: Trademarks A. Avoiding Trademark Pitfalls B. Trade Secrets C. Trademark Protection on the Internet IV. Legal Structures for Entrepreneurial Ventures A. Sole Proprietorships 1. ADVANTAGES OF SOLE PROPRIETORSHIPS 2. DISADVANTAGES OF SOLE PROPRIETORSHIPS B. Partnerships 1. ADVANTAGES OF PARTNERSHIPS 2. DISADVANTAGES OF PARTNERSHIPS C. Corporations 1. ADVANTAGES OF CORPORATIONS 2. DISADVANTAGES OF CORPORATIONS V. Partnerships and Corporations: Specific Forms A. Limited Partnerships B. Limited Liability Partnerships C. S Corporations D. Limited Liability Companies E. B Corporations F. L3C Corporations VI. Final Thoughts on Legal Forms VII. Bankruptcy A. The Bankruptcy Act B. Chapter 7: Straight Bankruptcy C. Chapter 11: Reorganization D. Chapter 13: Adjustment of Debts VIII. Minimizing Legal Expenses FEATURED CONTENT The Entrepreneurial Process: Parody or Trademark Infringement? The Entrepreneurial Process: Internet Intellectual Property Information Sources The Entrepreneurial Process: Incorporating on the Web LEARNING OBJECTIVES 1 To introduce the importance of legal issues to entrepreneurs 2 To examine patent protection, including definitions and preparation 3 To review copyrights and their relevance to entrepreneurs 4 To study trademarks and their impact on new ventures 5 To examine the legal forms of organization—sole proprietorship, partnership, and corporation 6 To illustrate the advantages and disadvantages of each of these three legal forms 7 To explain the nature of the limited partnership and limited liability partnerships (LLPs) 8 To examine how an S corporation works 9 To define the additional classifications of corporations, including limited liability companies (LLCs), B corporations, and low-profit, limited liability corporations (L3Cs) 10 To present the major segments of the bankruptcy law that apply to entrepreneurs CHAPTER SUMMARY A patent is an intellectual property right that is a result of a unique discovery. Patent holders are provided protection against infringement by others. This protection lasts for 14 years in the case of design patents and for 20 years in all other cases. Securing a patent can be a complex process, and careful planning is required. Some of the useful rules to follow in acquiring a patent were set forth in this chapter. A patent may be declared invalid for several reasons: failure to assert the property right for an unreasonable length of time, misuse of the patent, and inability to prove that the patent meets patentability tests. On the other hand, if a patent is valid, the owner can prevent others from infringing on it; if they do infringe on it, the owner can bring legal action to prevent the infringement as well as, in some cases, obtain financial damages. A copyright provides exclusive rights to creative individuals for the protection of their literary or artistic productions. This protection lasts for the life of the author plus 70 years. In case of infringement, the author (or whoever holds the copyright) can initiate a lawsuit for infringement. This action can result in an end to the infringement and, in some cases, the awarding of financial damages. A trademark is a distinctive name, mark, symbol, or motto identified with a company’s product(s). When an organization registers a trademark, it has the exclusive right to use that mark. Registration acquired before 1989 lasts for 20 years. However, after 1989, registration lasts for 10 years and is renewable every 10 years thereafter. In case of infringement, the trademark holder can seek legal action and damages. This chapter examined the three major forms of legal organization: sole proprietorship, partnership, and corporation. The advantages and disadvantages of each form were highlighted and compared. In addition, the characteristics and tax considerations of partnerships were compared with those of corporations. The specific forms of partnerships and corporations were examined. In particular, the requirements and benefits of limited partnerships, LLLPs, S corporations, LLCs, B corporations, and L3Cs were presented. During the last two decades, numerous business failures have occurred. Three major sections of the Bankruptcy Act are of importance to entrepreneurs. Chapter 7 deals with straight bankruptcy and calls for a liquidation of all assets to satisfy outstanding debts. Chapter 11 deals with reorganization, a format wherein a business continues operating and attempts to formulate a plan to pay a portion of the debts, to have the remaining sum discharged, and to continue to pay the debt in installments. Chapter 13 deals with individual debtors who file a plan for adjustment of their debts. This would apply to sole proprietorships because they are individually owned. More business bankruptcies are handled under Chapter 11 than under the other two sections. LECTURE NOTES Entrepreneurs are usually not attorneys, but they need to have sufficient knowledge on legal concepts related to their business venture. I. Intellectual Property Protection: Patents A patent provides the owner with exclusive rights to hold, transfer, and license the production and sale of the product or process. Design patents last for 14 years; all others last for 20 years. The patent provides the owner with a temporary monopoly on the innovation. Securing a Patent: Basic Rules Recommendations made by experts in pursuing a patent effectively: •Pursue patents that are broad, are commercially significant, and offer a strong position. •Prepare a patent plan in detail. •Have your patent relate to your original action plan. •Establish an infringement budget. •Evaluate the patent plan strategically. Securing a Patent: The Application Two detailed parts of innovations that should be included in patent applications: specification and claims. Specification •Introductory paragraph explaining invention •Cite and describe all prior art. •Summary of the invention. •Description of the invention. •Examples and/or experimental results. Claims •Series of short paragraphs one page or less long. •Identifies a particular feature or combination of features that is protected by the patent. File the application with the Patent and Trademark Office of the Department of Commerce. II. Intellectual Property Protection: Copyrights A copyright provides exclusive rights to creative individuals for the protection of their literary or artistic productions. Understanding Copyright Protection •Copyright in tangible form •Author’s own work •Product of own skill or judgment •Fair use” doctrine of copyrights—reproduction of a copyrighted work for purposes of criticism, comment, news reporting, teaching, scholarship, or research Protecting Ideas? It is not possible to copyright an idea, but the particular mode of expression of that idea can be copyrighted. III. Intellectual Property Protection: Trademarks A trademark is a distinctive name, mark, symbol, or motto identified with a company’s product(s) and registered at the Patent and Trademark Office. Avoiding Trademark Pitfalls Trademark registration is very expensive, but infringement is even more expensive. Five rules to avoid pitfalls in selecting a trademark: •Never choose without trademark search. •Trust lawyer’s judgment. •Seek a coined or fanciful mark. •Select a logotype or name that is highly suggestive of the product. •Avoid abbreviations and acronyms. Trade Secrets A trade secret is anything that makes the individual company unique and has value to a competitor. •The business would lose its advantage if the competition were to obtain it. •The owner has taken reasonable steps to protect the secret from disclosure. Trademark Protection on the Internet Increasingly, courts are treating cyberlaw similar to traditional law. IV. Legal Structures for Entrepreneurial Ventures When considering which legal form to use, entrepreneurs should consider: (1) how easily the form can be implemented, (2) the amount of capital required to implement it, (3) legal considerations that might limit the entrepreneur, (4) taxes, and (5) liability. Sole Proprietorships A sole proprietorship is a business that is owned and operated by one person. ADVANTAGES OF SOLE PROPRIETORSHIPS •Ease of formation •Sole ownership of profits •Decision making and control vested in one owner •Flexibility •Relative freedom from government control •Freedom from corporate business taxes DISADVANTAGES OF SOLE PROPRIETORSHIPS •Unlimited liability •Lack of continuity •Less available capital •Relative difficulty in obtaining long-term financing •Relatively limited viewpoint and experience Partnerships A partnership is an association of two or more persons acting as co-owners of a business for profit. ADVANTAGES OF PARTNERSHIPS •Ease of formation •Direct rewards •Growth and performance facilitated •Flexibility •Relative freedom from governmental control and regulation •Possible tax advantage DISADVANTAGES OF PARTNERSHIPS •Unlimited liability of at least one partner •Lack of continuity •Relative difficulty in obtaining large sums of capital •Being bound by the acts of just one partner •Difficulty of disposing of partnership interest Corporations A corporation is a separate legal entity apart from the individuals who own it. ADVANTAGES OF CORPORATIONS •Limited liability •Transfer of ownership •Unlimited life •Relative ease of securing capital in large amounts •Increased ability and expertise DISADVANTAGES OF CORPORATIONS •Activity restriction •Lack of representation •Regulation •Organizing expenses •Double taxation V. Partnerships and Corporations: Specific Forms Limited Partnerships Limited partnerships are used when a form of organization is needed to permit capital investment without responsibility for management and without liability for losses beyond initial investment. Limited Liability Partnerships Limited liability partnerships allow professionals the benefits of a partnership while avoiding personal liability for the malpractice of other partners. S Corporations S Corporations are taxed similar to partnerships, and S corporations avoid double-taxation problem of corporations. Limited Liability Companies The LLC is a hybrid form of business enterprise that offers the limited liability of a corporation but the tax advantages of a partnership. B Corporations The legal structure of B corporations expands corporate accountability so that they are required to make decisions that are good for society, not just their shareholders. Certified B corporations are certified by B Lab, a nonprofit. L3C Corporations A low-profit, limited liability company, known as the L3C, has an explicit primary charitable mission and only a secondary profit concern. It is designed to attract private investments and philanthropic capital in ventures designed to provide a social benefit. VI. Final Thoughts on Legal Forms An entrepreneur must always seek professional legal advice in order to avoid misunderstandings, mistakes, and added expenses. VII. Bankruptcy Bankruptcy occurs when a venture’s financial obligations are greater than its assets. The Bankruptcy Act The Bankruptcy Act provides specific procedures for handling insolvent debtors. The purpose of act: •Ensure property distributed fairly among creditors •Protect creditors from debtors unreasonably diminishing their assets •Protect debtors from creditors Three major sections of act: •Chapter 7: Straight bankruptcy •Chapter 11: Reorganization •Chapter 13: Adjustment of debts Chapter 7: Straight Bankruptcy •Referred to as liquidation •Debtor surrenders all property to court trustee •Assets sold and proceeds paid to creditors •Debtor relieved of obligations •May be voluntary or involuntary Chapter 11: Reorganization •Most common form of bankruptcy •Develops plan to pay a portion of debts •Plan must provide several things: (1) divide creditors into classes, (2) set forth how each creditor will be satisfied, and (3) state which claims are impaired by plan. •Debtor continues operation after filing •Once accepted by creditors, it is binding on the debtor Chapter 13: Adjustment of Debts •Allows individuals to (1) avoid bankruptcy declaration, (2) pay installments, and (3) be protected by federal court. •Eligibility requirements for Chapter 13: (1) unsecured debts of less than $360,475, (2) secured debts of less than $1,081,400, and (3) must be voluntary VIII. Minimizing Legal Expenses In legal proceedings, the entrepreneur can run up large legal fees. Some tips for keeping legal fees down include: establishing a clear fee structure with an attorney, negotiating legal fees, settling before litigating, working with your attorney during regular business hours, and involving attorneys early on when it’s feasible. CHAPTER 10 MARKETING CHALLENGES FOR ENTREPRENEURIAL VENTURES CHAPTER OUTLINE I. The New Marketing Concept for Entrepreneurs II. Marketing Research A. Defining the Research Purpose and Objectives B. Gathering Secondary Data C. Gathering Primary Data 1. DEVELOPING AN INFORMATION-GATHERING INSTRUMENT D. Quantitative versus Qualitative Marketing Research E. Interpreting and Reporting Information F. Marketing Research Questions III. Inhibitors to Marketing Research A. Cost B. Complexity C. Strategic Decisions D. Irrelevancy IV. Social Media Marketing A. Key Distinctions of Social Media Marketing B. Developing a Social Media Marketing Plan C. Mobile Marketing V. Entrepreneurial Tactics in Market Research VI. The Components of Effective Marketing A. Marketing Philosophy B. Market Segmentation C. Consumer Behavior VII. Developing a Marketing Plan A. Current Marketing Research B. Current Sales Analysis C. Marketing Information System D. Sales Forecasting E. Evaluation F. Final Considerations for Entrepreneurs VIII. Pricing Strategies A. Views of Pricing B. Product Life Cycle Pricing C. Pricing in the Social Media Age FEATURED CONTENT The Entrepreneurial Process: Competitive Information The Entrepreneurial Process: The Guerrilla Marketing Plan LEARNING OBJECTIVES 1 To introduce the new marketing concept for entrepreneurs 2 To review the importance of marketing research for new ventures 3 To identify the key elements of an effective market survey 4 To present factors that inhibit the use of marketing 5 To present the emerging use of social media marketing and mobile marketing for entrepreneurial firms 6 To identify entrepreneurial tactics in marketing research 7 To examine the marketing concept: philosophy, segmentation, and consumer orientation 8 To establish the areas vital to a marketing plan 9 To discuss the key features of a pricing strategy 10 To discuss pricing in the social media age CHAPTER SUMMARY The new marketing logic requires a fundamental rethinking of the old rules and realizes that today’s marketing is dynamic and happening in real time where the customer is in control. This new marketing for entrepreneurs includes knowing what a market consists of, the understanding of marketing research, the development of a marketing plan, the effective understanding and application of social media marketing, and the proper approach to a pricing strategy. Marketing research involves the gathering of information about a particular market, followed by analysis of that information. The marketing research process has five steps: (1) Define the purpose and objectives of the research, (2) gather secondary data, (3) gather primary data, (4) develop an information-gathering instrument (if necessary), and (5) interpret and report the information. Four major reasons that entrepreneurs may not carry out marketing research are: (1) cost, (2) complexity of the undertaking, (3) belief that only major strategic decisions need to be supported through marketing research, and (4) belief that the data will be irrelevant to company operations. Usually they misunderstand the value of marketing research or fear its cost. Social media marketing describes the use of social networks, online communities, blogs, wikis, and other online collaborative media for marketing purposes. The most common social media marketing tools include Twitter, blogs, LinkedIn, Facebook, Flickr, and YouTube. A social media marketing plan should be developed that details the venture’s social media goals and the actions necessary to achieve them. Mobile devices are now within everyone’s reach, and thus people are connected with their social networks constantly. Mobile social media marketing is a fast-paced and high-impact marketing tool that many companies have started to use very successfully as part of their overall marketing strategy. Many companies are now using mobile social media applications as their standard communication strategy to connect with consumers. Because new start-up ventures are resource constrained, the chapter covered some innovative methods for entrepreneurs to conduct market research. From there we examined the development of a marketing concept which has three important parts. The first part is the formulation of a marketing philosophy. Some entrepreneurs are production driven, others are sales driven, and still others are consumer driven. The entrepreneur’s values and the market conditions will help determine this philosophy. The second part is market segmentation, which is the process of identifying a specific set of characteristics that differentiates one group of consumers from the rest. Demographic and benefit variables often are used in this process. The third part is an understanding of consumer behavior. Because many types and patterns of consumer behavior exist, entrepreneurs need to focus on the personal and psychological characteristics of their customers. In this way, they can determine a tailor-made, consumer-oriented strategy. This customer analysis focuses on such important factors as general buying trends in the marketplace, specific buying trends of targeted consumers, and the types of goods and services being sold. A marketing plan is the process of determining a clear, comprehensive approach to the creation of customers. The following elements are critical for developing this plan: current marketing research, current sales analysis, a marketing information system, sales forecasting, and evaluation. Pricing strategies are a reflection of marketing research and must consider such factors as marketing competitiveness, consumer demand, life cycle of the goods or services being sold, costs, and prevailing economic conditions. Today’s social media start-ups are finding unique ways of generating revenue from the very beginning. In the chapter, we presented five revenue models including freemium, affiliate, subscription, virtual goods, and advertising. LECTURE NOTES I. The New Marketing Concept for Entrepreneurs The new marketing logic requires a fundamental rethinking of the old rules that applied in a world of stability and control. To illustrate this major rethinking in marketing, we must shift from the 4Ps to the 4Cs: From Product to Cocreated From Promotion to Communities From Price to Customizable From Place to Choice II. Marketing Research Marketing research involves the gathering of information about a particular market followed by analysis of that information. Defining the Research Purpose and Objectives 1. Identify where potential customers go to purchase the good or service in question. 2. Identify why they choose to go there. 3. Identify the size of the market and how much of it can the business capture. 4. Identify how the business compares with competitors. 5. Identify the impact the business’s promotion has on customers. 6. Identify the types of products or services desired by potential customers. Gathering Secondary Data 1. Secondary data consist of information that has already been compiled. 2. Less expensive to gather than primary data. 3. Secondary data may be internal or external. •Internal secondary data consist of information that exists within the venture such as business records. •External secondary data are available in periodicals, trade association literature, and government publications. 4. Several problems occur due to the use of secondary data. •Data may be dated and less useful. •Units of measure in secondary data may not fit current problems. Gathering Primary Data Primary data consist of new information accumulated through observational methods and questioning methods. Observational methods avoid contact with respondents and can be used economically. Questioning methods involve contact with the respondents. Surveys include contact by mail, telephone, and personal interviews. Mail surveys are often used when respondents are widely dispersed and have low response rates. Telephone and personal interviews involve verbal communication with respondents and provide higher response rates. Personal interviews are the most expensive and people are reluctant to grant them. Experimentation is a form of research that concentrates on investigating cause-and-effect relationships. DEVELOPING AN INFORMATION-GATHERING INSTRUMENT The questionnaire is the basic instrument for a survey. Several considerations for designing a questionnaire: •Make each question pertain to a specific objective. •Place simple questions first. •Avoid leading and biased questions. •Ask “How could this question be misinterpreted?” •Give concise but complete directions. •Use scaled questions rather than simple yes/no questions. Quantitative versus Qualitative Marketing Research •Quantitative research involves empirical assessments from numerical measurements. Uses larger samples and statistical analyses to generate results. Is “objective.” •Qualitative research involves in-depth informational assessment. Uses smaller samples and generates “subjective” results. Interpreting and Reporting Information •After data are accumulated, they must be organized into meaningful information. •Methods of summarizing and simplifying data include tables, charts, and graphs. •Descriptive statistics such as mean, mode, and median are also helpful. Marketing Research Questions Research questions might include questions on all the following aspects of a business: •Sales •Distribution •Markets •Advertising •Products III. Inhibitors to Marketing Research Despite the fact that most entrepreneurs would benefit from marketing research, many fail to do it. Cost •Marketing research can be expensive. •Affordable marketing techniques exist for smaller companies. Complexity •Quantitative aspects frighten many entrepreneurs. •Key concern is interpretation of the data. •Entrepreneurs can obtain advice and counsel from specialists. Strategic Decisions •Some entrepreneurs feel that only major strategic decisions need marketing research support. •Sales efforts could be enhanced through research results. Irrelevancy •Some entrepreneurs believe that marketing research data either tell them what they already know or are irrelevant. •Data that confirm what is already known can be acted upon with more confidence. •Indicated by these inhibitors, most of the reasons that entrepreneurs do not use marketing research center on either a misunderstanding of its value or a fear of its cost. IV. Social Media Marketing Social media marketing describes the use of social networks, online communities, blogs, wikis, and other online collaborative media for marketing purposes. Three important aspects to social media marketing: •Create something of value (an event, a video, a tweet, or a blog entry, etc.) that attracts attention and becomes viral in nature. •Enable customers to promote a message themselves with multiple online social media venues. •Encourage user participation and dialogue. Key Distinctions of Social Media Marketing Useful distinctions between traditional marketing (4 Ps) and social media marketing (4Cs) based on the customer focused concept: •Control versus contributions •Trust building •Two-way communication Developing a Social Media Marketing Plan Social media marketing plan details an organization’s social media goals and the actions necessary to achieve them. Critical steps for the entrepreneur to keep in mind: •Listen •Identify •Categorize •Appraise •Implement •Collaborate •Contribute •Convert •Monitor Mobile Marketing Mobile marketing applications allow the creation and exchange of user-generated content and a plethora of marketing opportunities, such as text messaging, mobile applications, and mobile advertising via Common mobile computing devices include cell phones, PDAs, smartphones, tablet PCs, and netbooks. Mobile marketing and the use of social media are potentially more important than almost any other type of marketing. Mobile social media applications can be differentiated based on location-sensitivity. The most sophisticated forms of mobile social media applications are those that account for both time and location simultaneously. The overall mobile social media strategy can be complicated, but following the “Four Is” (integrate, individualize, involve, and initiate) will help one grasp the overall strategy. V. Entrepreneurial Tactics in Market Research Entrepreneurs tend and need to sometimes become innovative with their market research. Entrepreneurial tactics include: •Guerrilla Marketing •Insights in Ordinary Patterns •Technological Tools •Customer Observation •Web-Based Surveys •Focus Groups •Lead User Research •Blog Monitoring •Archival Research VI. The Components of Effective Marketing Marketing Philosophy •A production-driven philosophy—based on the belief “produce efficiently and worry about sales later.” •A sales-driven philosophy—focuses on personal selling and advertising to persuade customers to buy the company’s output. •A consumer-driven philosophy—relies on research to discover consumer preferences, desires, and needs before production actually begins Market Segmentation Market segmentation is the process of identifying a specific set of characteristics that differentiate one group of customers from the rest. Consumer Behavior There are many types and patterns of consumer characteristics. Marketing experts have tied these characteristics to the five types of consumers: (1) innovators, (2) early adopters, (3) early majority, (4) late majority, and (5) laggards. Five common ways consumers view a product or service: as convenience goods, shopping goods, specialty goods, unsought goods, and new products. VII. Developing a Marketing Plan A marketing plan is the process of determining a clear, comprehensive approach to the creation of customers. Current Marketing Research—determining who the customers are, what they want, and how they buy. Current Sales Analysis—promoting and distributing products according to marketing research findings. Marketing Information System—collecting, screening, analyzing, storing, retrieving, and disseminating marketing information on which to base plans, decisions, and actions. Sales Forecasting—coordinating personal judgment with reliable market information. Evaluation—identifying and assessing deviations from marketing plans. Final Considerations for Entrepreneurs—marketing plans must be based on the venture’s specific goals. VIII. Pricing Strategies The following factors affect entrepreneurs in the pricing of their products or services: •The degree of competitive pressure •Availability of sufficient supply •Seasonal or cyclical changes in demand •The costs of distribution •The product’s life-cycle stage •Changes in production costs •Prevailing economic conditions •Customer services provided by the seller •Amount of promotion done •The market’s buying power Views of Pricing Pricing can be viewed as value, variable, variety, visible, and virtual. Product Life Cycle Pricing Pricing procedures differ depending on the nature of the venture: retail, manufacturing, or service. •Skimming—deliberately setting a high price to maximize short-term profits Penetration—setting prices at such a low level that products are sold at a loss •Consumer pricing—combining penetration and competitive pricing to gain market share •Demand-oriented pricing—a flexible strategy that bases pricing decisions on the demand level for the product •Loss leader pricing—pricing the product below cost in an attempt to attract customers to other products Pricing in the Social Media Age There are numerous variations of revenue models including freemium, affiliate, subscription, virtual goods, and advertising. •Freemium model—offers a basic service for free, while charging for a premium service with advanced features to paying members. •Affiliate model—the business makes money by driving traffic, leads, or sales to another, affiliated company’s website. •Subscription Model—this requires users to pay a fee (generally monthly or yearly) to access a product or service. •Virtual Goods Model—users pay for virtual goods, such as upgrades, points, or gifts, on a website or in a game. •Advertising Model—advertisements are sold against the traffic of the site. Instructor Manual for Entrepreneurship: Theory, Process, and Practice Donald F. Kuratko 9781305576247