“What are the mistakes should I avoid?”
At Strategic Choice Partners, this is one of most common questions we hear from a start-up or young party plan company. I’d like to say that the best answer is “Avoid them all!” But unfortunately, by the time we’re brought in to help, it’s often too late. Avoidable mistakes have already happened. It doesn’t have to be this way.
In this article, we’ll explore the five most common mistakes new companies make, and how to avoid them. For the record, those mistakes are:
* Working from overly optimistic growth forecasts.
* Failing to understand the relationship between product offerings and inventory management, particularly when goods are imported.
* Adopting the wrong compensation plan.
* Establishing an in-house warehouse and distribution center
* Failing to provide outstanding service to customers and sales force members.
#1 and #2 stand out as the most common ones, but any one of them can help sink a startup. So let’s take a close look at each.
MISTAKE #1-Working from overly optimistic growth forecasts
Some companies just take off and enjoy near-instant phenomenal growth. Unfortunately, too many other hopeful startups believe the same thing will happen for them, and most of the time, it doesn’t. That’s because they focus on the wrong thing, which is trying to recruit large numbers of new sales people. But anyone involved in building more than one new party plan company knows that sheer numbers aren’t the answer.
Instead, the goal should be to develop 3-5 strong, consistent sales leaders. Then let them turn the promised potential of the new compensation plan into their own personal realities. In the process, everyone in the sales force will see how performance leads to rewards and success. When pace-setting leaders set an example for others, that’s when recruiting and sales really begin to grow.
I’ve seen it happen time and again. A young company with just 300 total recruits but 2 to 5 rising stars will almost always grow faster than a company with 1,000 recruits but no pace setting leaders.
Additionally, the performances (personal and team) of your pace setters will establish your key operating indicators for productivity, activity rates and average central team sales. Without these hard numbers, it’s almost impossible to make a truly accurate sales forecasts for year two and beyond.
So avoid the mistake of overly optimistic sales forecasts. Don’t concentrate on large recruiting numbers in your first year. Instead, focus on developing your first 3 to 5 high performing pace setting leaders. This is a much more effective strategy.
MISTAKE #2- Failing to understand the relationship between product offerings and inventory management
Proper forecasting and inventory management is a challenge for all start-up companies, but it’s especially risky for party plan companies selling non-consumable products. In most cases, companies must source these non-consumable products from Asia, Mexico or Latin America. Lead times are often 4-5 months to ensure timely delivery. With no history to guide the buying quantities it’s very much a “best guess” scenario. This is one reason we strongly suggest new companies hold at least 10 “test parties.” The purchase rates from these parties let you know what your best-selling products are likely to be.
Before placing initial order quantities, every startup company needs to thoughtfully consider these constants of the business:
CONSTANT #1: Back orders are your worst enemy. Nothing will stop recruiting, torpedo sales and generally demoralize your sales force like stock outs and back orders. Sellers absolutely hate out-of-stock situations, and with good reason. First, it’s embarrassing for them. Second, out-of-stocks mean extra work. Sellers must either return the purchase price, set up the back-order procedure or sell the customer something else. So back-orders are the bad news. Here’s the good news.
CONSTANT #2: While the risk of back orders can never be eliminated, it can be controlled. Here are a few steps you can take to proactively address the problem.
1- Buy larger quantities of fewer products. A common startup mistake is offering more products and SKUs than they really need. When a new company has a fixed amount of capital available to invest in inventory, its’s better to buy larger quantities of fewer products rather than have thin inventories of a wide selection of products. The “wide selection” offering will inevitably lead to more runs on favorite items and more out of stock situations. Companies should always launch with the lowest number of product offerings possible, and then have reasonable inventories of those products.
2- Be prepared! Have a “Stop Sell” program already in place. You’ll rarely have a start-up situation without a few stock out situations. So it’s important from day one to publish and train the sales force on a “stop sell” program. Here’s what that means: when inventories on certain items are down to about 5-7 days average run rate, the company puts those items on a stop sell status. The sales force is trained to check the inventory availability page on their back office every day and before any sales event. The “stop sale” program does not make the sales force happy either, but it does allow them to not make the sale on the item in the first place. So they save time, avoid embarrassment and have the opportunity to sell the customer another item that is in stock.
Balancing inventories against supply & demand is always a juggling act. So make informed ordering decisions and be prepared for the inevitable issues.
MISTAKE #3: Adopting the wrong compensation plan
Too often we see new companies failing because they chose to copy a very successful company’s compensation plan. Don’t do that. Instead, design a compensation plan that fits:
* Your product line
* Your ratio of cost of goods sold to the suggested retail price
* Your primary method of selling the product to retail customers, and
* Your culture, or the culture you want to develop.
Simply stated, not all compensation plans fit all product lines, margin levels and sales methods. Copying a compensation plan without a serious analysis of whether that plan will work for your company is an almost certain path to failure.
MISTAKE #4: Establishing your own in-house warehouse and distribution center
It may seem counter-intuitive to focus on warehousing and distribution as a startup company mistake. However, once you consider the benefits of the affordable alternatives to building your own in-house warehouse and distribution function, it might make sense for you. Here’s what you can do:
-Unlike earlier times, the industry now has several highly professional third party warehouse and distribution operations to choose from. Due to their volume pricing, these operations can offer deep discounts on shipping fees, resulting in significant savings for you. Partnering with an experienced third party provider allows a startup to:
– Avoid the cost of operating a warehouse. These include rent, utilities, and insurance, plus the labor costs of a warehouse manager and staff.
– Avoid the significant investment necessary for shelving, rolling racks, receiving programs, bar coding and picking systems.
Outsourcing your warehouse and distribution function saves considerable management time and effort. It also assures good performance, good timing and high accuracy from the beginning. For many if not most startups, it’s a cost-efficient alternative to building your own system from scratch.
MISTAKE #5: Failing to provide outstanding service to customers and sales force members
For many startups, the how and why of providing customer service to retail customers and their volunteer sales force is an after-thought. But in today’s world, failure to pay attention to this can sink your business.
We live in a world where our competition provides 24/7 instant access to customer service. The best online retailers are setting the gold standards; they’ve created a set of customer expectations that cannot be denied. So startup companies must have the coverage, systems and personnel to match expectations. That means providing as close to instant access to customer service as possible. Making this happen requires a commitment of management time, financial resources and technology. And people. You’ll need bring in the right people.
So these are the most common and most serious mistakes that new companies, especially party plan companies, make. Every startup will probably make some combination of these mistakes at some time. But there is a way to greatly reduce or even eliminate them. First, you need to know these stumbling blocks are out there. And then you need to prepare for them.
By: Alan Luce, Sr. Managing Principal at Strategic Chice Partners