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Things to Consider Before You Start a Home Business

What's the perfect home business for you? You've listed your skills. You've outlined your interests. You've described your family's preferred lifestyle. You've come up with a business idea. Next, consider such questions as: Are there customers for my product or service? How do I know? How will I find them? Who are my competitors? What will I charge? How will I promote my product or service? Finding the answers to these questions is the challenging and sometimes tedious homework that will help you determine your chances for success, and whether you should look for another more marketable idea.

What Is My Product?

"I bathe and groom poodles and small dogs." "I design, construct, and sell roll-top desks." "I provide accounting services to small business clients."
"I make dried flower arrangements." "I teach intermediate and advanced piano to children." "I design and implement direct mail advertising
campaigns for small businesses and nonprofit organizations."

The first step in creating a home business is to decide what your product is. What are you selling? Practice writing a short, specific statement describing your product or service. Getting a clear idea of a business concept is one of the most difficult tasks in creating a business. Your statement may change several times as you experiment with the market and test your skills. Instead of "I make toys," you may want to narrow your product line to "I make wooden dolls." Instead of "I write software programs for small business needs," you may decide to tap into a big market and "provide training for employees of small businesses in the use of accounting packages." See how it feels to describe your product or service to family, friends, potential customers, and fellow business people. Is your description clear and brief? Can you say it with confidence and enthusiasm?

Who Will Buy It?

To develop and test your home business idea, answer the question "Who will buy my product or service?" Make a list of potential customers: individuals, groups, segments of the population, or other businesses that need your product or service. If you are making fabric-covered lap boards for people confined to bed, how will you quickly and inexpensively find a market? ()

Through hospitals or home nursing care organizations? Through craft stores by displaying them as gift items? In mail order catalogue? Is there a market avenue that will reach children? Ask friends and colleagues for help in brainstorming all the possible markets (customers) and uses for your product or service.

Who Is the Competition Home Based Business?

Your home based business planning must also include an up-to-date analysis of your competition. Why? Because you need to plan your market position--how you will fit into the marketplace. Will your product or service be cheaper or more expensive than that of the major competitions? Will it be more durable? Will you be open during hours that your competitors are closed? What benefits can you build into your product or service that your competitors don't offer? Will you do rush jobs?

In planning your business, look for a unique niche that will give you freedom from strong competition or that will make your product or service more valuable than others in the market. If you plan to open a day-care center and find that none in your area is open before school, early opening might make your service more competitive. If you discover that local caterers have overlooked the office party market, you might highlight that in your brochure. The more you can learn about your competition, the better you'll be able to decide how to position yourself in the market.

Newspaper ads and trade magazines are other good sources of market information. Check also with the Chamber of Commerce, your county office of economic development, the Census Bureau, and business and professional organizations to gather market and pricing data.

Where Are the Buyers? How Can I Find Them?

As you become more familiar with the competition, you will also be discovering where and how to find buyers. Whatever the type of home business you want to open, you will need to do market research to determine if there are buyers for your idea, where they are, and how to find them. (And in the process, you will also be gathering information on pricing.)

Visit your local library to compile local and county statistics on the size and makeup of your market. (While you are at the library, check out some books on marketing research so you will know what you are getting into.) Also, check those of the following resources that might have data about your product or service or the people who would use it:

Encyclopedia of Associates. Gale Research Company, Book Tower, Detroit, MI 48226.

Ayer Directory of Publications. Lists trade publications by subject matter. Contact the sales, marketing, or research departments for buying patterns among their readers.

"Survey of Buying Power." Sales, Marketing, Management Magazine. July issue each year.

Thomas' Register. Lists companies by product and service line, organized geographically and alphabetically.

Directory of Business, Trade, and Public Policy Organizations. U.S. Small Business Administration, Office of Advocacy.

Department of Commerce Publications. Data User Series Division, Bureau of the Census, Washington, D.C. 20233.

County Business Patterns. U.S. Department of Commerce, Bureau of the Census. Available for each state.

When your marketing research is completed you will have 1) identified your potential customers; 2) found out all you can about their habits, needs, preferences, and buying cycles; and 3) decided how to reach them to generate sales.

How Much Shall I Charge

Four main factors will help you decide what to charge for your product or service: 1) your direct and indirect costs; 2) the profit you want to make;
3) your market research data on competitors' prices; and 4) the urgency of the market demand. There is rarely an exact "right" price but rather an
acceptable price range within which you will want to fall. Avoid the common mistakes made by many new business owners--charging too much or too little. Use several approaches to arrive at a cost and "test" the price. If your ego is too involved, your price may be too high. On the other hand, if you have the attitude that "this is just a little something I do in my spare time" or "anybody could do this," then your price may be too low.

Here is a formula for setting a fair price. Calculate your price using other approaches, too, before you make a final decision on price:

Typical Pricing Formula

1. Direct Material Costs--Figure the total cost of the raw materials you have to use to make up your item. Figure the cost of a group of items and then divide by the number of items to find the cost per item. If you can easily and immediately determine the material cost of a single item, fine. Some items are produced in batches, however, and it is easier to get an item cost by dividing the cost of a batch by the number of items eventually produced.

2. Direct Labor Costs--Figure what you pay to employees to produce the item (whether or not you have employees now). You must assign a wage figure, even if you are the only one producing the item. Take the weekly salary you pay someone to produce the necessary number of items and divide it by the number of items. Add this figure to the Direct Material Costs total.

Materials + Labor = $__________.

3. Overhead Expenses--These expenses include rent, gas and electricity, business telephone calls, packing and shipping supplies, delivery and freight charges, cleaning, insurance, office supplies, postage, payroll taxes, repairs, and maintenance. The accuracy of your costing depends on estimating logical amounts for all categories of expenses. If you are working at home, figure a portion of your total rent or mortgage payment (in proportion to your work space and storage areas), or assign a reasonable, competitive rent figure for the same amount and type of space. List all overhead expense items and total them. Divide the total overhead figure by the number of items per month (or time period you used above). The answer is your overhead per item

Overhead + Materials + Labor = Total Cost/Item

4. Profit--Include an amount added to the cost of each item so you won't end up just breaking even or making the employees' wages. Check your competition and see what they are charging. (Retailers generally double the wholesale price.) If your product is a little better than the competition, charge a little more. If your product is comparable, price it similarly. Remember, you will get the profit from each sale, in addition to the salary figure. Add the profit figure you have chosen to the total cost per item to get your total price per item.

Profit + Total Cost/Item = Total Price/Item

Remember, the main purpose in operating a business is to make a profit. Don't undersell your product or service just because "I'd be baking cakes anyway" or "I'm just starting out" or" I work out of my home." If you have a new, rare, handmade product or personalized service, the demand may be so high that customers are willing to pay a little more.

Home Based Business Promotion

Promotion is an overall, long-range plan designed to inform potential customers about what you have to sell. Advertising is usually thought of as the paid communication part of the promotion program.

To develop a total promotional campaign you must answer these questions: 1) What image or message do I want to promote? 2) What are the best media and activities for reaching my potential customers? 3) How much time and money can I spend on the effort?

Develop a long-range, consistent program for building image and reaching customers. Your image should be reflected in your business card, logo,
stationery, brochure, newsletter, telephone answering service, signs, paid ads, and promotional activities.

Word-of-mouth recommendations from satisfied customers are the very best promotion any business can have. Consider which promotional tactics will build the confidence and image you are looking for--giving speeches and interviews (often good for counselors, teachers, lawyers, consultants), having an open house or holiday home sale (for craftspeople), holiday recitals or shows (for music and dance teachers or day-care operators), free demonstrations and samples (for retailers, decorators, caterers).

Several small ads may have more impact than one large, splashy ad. Conduct a campaign rather than having a one-shot ad or event. If you hire a public relations firm, look for one that can give you personal attention and develop a total marketing plan for you, not just a couple of ads. The plan should include market research, a profile of your target audience, a clear description of the image they recommend you project, the written copy, and a list of media (including cost and scheduling calendars) that are best for your type of product or service. As a new small business owner, you will probably decide to set aside a certain dollar amount per year or a percentage of past, current, or projected sales for paid advertising.

You're The Boss at your Make Money at Home Business

A telling sign on a new business owner's desk read: "Yesterday I didn't even know how to spell ENTREPRENEUR and now I am one!" Now that you have decided to open a home-based business, all decisions will be your responsibility, not just those you previously enjoyed because they involved your area of expertise. Of course, as a day-care operator you already knew how to soothe an upset child, but as the owner of that business, do you know when to file your taxes? As a consultant you have over 20 years' experience advising organizations on personnel matters, but do you know if it's to your advantage to incorporate? You are an expert at word processing, but do you know how to develop an efficient record-keeping and billing system? You are the boss now and the good health of your home based business depends on your management skills.

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