Critical Success Factors for a Startup!
Working with entrepreneur and startup clients can be rather predictable at the outset. A few concepts, main ingredients for a realistic and viable business plan, need to be explained and debated passionately almost every time before we even start. For instance , a Unique Selling Proposition (USP), of the client’s product or service, and the related Price Sensitivity, two critical success factors for a business to succeed, more often than not, are totally ignored in the “entrepreneurs’ enthusiasm”, or seem like alien concepts to others!
Many entrepreneurs and startups see their product, service or concept as the next best thing since sliced bread. Like lovesick puppies, or a Crazy Chef they see everything through rose colored glasses, often oblivious to the basic principles of business. Don’t get me wrong, passion and enthusiasm for your new business, your product or service is great, even a must. But unless it is realistic, it’s useless and it can cost you!
A USP and related Price Sensitivity are two concepts which seldom fail to bring an expression of bewilderment to the face of our clients. This article will try to explain why both are so important to the success of any business, especially a startup.
Introduction to the Unique Selling Proposition
After the client’s initial introduction and data-dump, our next statement or question is, “well, those sales numbers look very optimistic, overly optimistic as a matter of fact; really, where do they come from!?”. What competition do you face and what’s your USP, your Unique Selling Proposition? Blank stare, little awkward pause, and a response like “well we think with our fabulous product we can easily make those numbers”. The look on our face “With What?!, How?!”.
Basic economic principles always apply, as they do in a situation like that. If you have lots of competition, you will be a “me too” product, competing on price and spending a lot of advertising money to (try to) build your product and brand. If you have little competition and one or more USP’s you have a reason to lure customers away from the competition to buy your product or service. And if that USP is compelling, your potential customers may even condone a slightly higher price. Thus, the Price Sensitivity is lower when you have that competitive edge, with a USP. Makes sense?
Price Sensitivity of Gillette Blades and Razors
The clearest example of a USP is Gillette’s Blades and Razors; literally and figuratively they had an edge. For example, Gillette would launch a razor blade with two blades, claiming superior shaving results over the competition whose version only had one blade. This competitive advantage would lure customers away from the competition (to get a better shave) and it allowed Gillette to charge a higher price than the competition. Not only that, but the moment the competition came out with the same number of blades per razor-blade, Gillette would introduce a new version with three blades. And so on.
By keeping this competitive advantage, this USP of one extra blade with superior performance over the competition, Gillette continued to draw customers away from the competition while still charging higher prices for their blades. The fact that you would want, need, to buy a new blade when you cut your face or other body part, would make the Gillette Blades and its price, relatively Price Insensitive. In plain English, Gillette could put price increases through, and most customers would still buy their blades and razors without blinking, because for that higher price they would get a better shave (than the competition).
Price Sensitivity of Oral-B Toothbrushes
On the other end of the spectrum, Oral-B toothbrushes were different. To start with, Oral-B toothbrushes have much more competition from other brands who’d offer similar product, without any clear discernable difference, other than color or design. So, the Oral-B toothbrush is in effect a “me too” product”. Which means if you increase your price, there are plenty of competitors you can choose from, to get a good (enough) toothbrush for a lower price. In other words, the toothbrush is Price Sensitive!
And, to put it in perspective, contrary to when you cut yourself with a blade shaving, if you brush with the same brush for months, even though the bristles are way wide, and you know should change them, you don’t feel any pain. You don’t change the brush because a) you don’t have instant discomfort (cavities only appear after months of bad brushing) and b) you don’t want to spend money. Result, the need to buy a new brush, at any price is not there, thus the Price Sensitivity is higher than for blades and due to lots of competition even higher.
The Overall Lesson of a USP and Price Sensitivity
When you build your business plan, when you create a financial model and budget, it is absolutely critical to the validity of your unit sales, your pricing policy and thus your sales revenue, to understand your competition, your product’s Unique Selling Proposition as compared to your competition and the Price Sensitivity of your product.
If you don’t understand those factors, most likely you will overestimate your unit sales, and underestimate the effect of your competition on your top line revenue. And thus, you may come up with a financial model and budget that is not realistic. Especially at the beginning, where you are trying to ramp up sales for “Proof of Concept” to show potential investors that you can hit aggressive, yet realistic sales numbers!
An unrealistic financial model may scare away potential investors and with or without investors may result in missing sales and profit targets. Ultimately it may lead to running out of cash before the plan, the business, becomes successful.
Whatever product or service you believe is the best thing since sliced bread…….. always ask yourself first, what is my USP? Do I have one and is my product Price Sensitive. If you don’t have an edge, it will become an advertising race between you and your competition. If on top of that you have a Price Sensitive product, you may not have the margin to fund that race, plain and simple.
Digital Artist + Marketer | Business Consultant | Startups + Small Businesses.
Specialties – Web Design | Digital Marketing | E-Commerce | Business Plan and Financial Modelling
Hans van Putten owner of 40parkLane,llc ran operations of his food manufacturing company for 17+ years building the Carolyn’s Handmade brand under the umbrella of 40ParkLane,llc.
After the successful sale of the food business, he took advantage of the years of strategic planning, operations management, web design, digital marketing and photography experience , to help startups, small businesses and home businesses and has been involved in a number of start-up ventures since.
Prior to founding 40parkLane,llc Hans worked for the Gillette Company for 10 years in various financial roles of increasingly bigger responsibility, leaving as Director of Business Planning for The International Group at Gillette HQ, Boston. Hans has an MBA (Marketing & International Business) from Aston University, and a BA in Business Administration from IHBO de Maere.