Know your market

Broadly speaking, three types of potential customers can be identified: private individuals, other businesses and government.

Having a solid understanding of these groups could boost the entrepreneur’s chances at start-up, but the fundamental issues of customer service and commitment to quality will loom large.

“Often too much is made about the textbook notion of a target market,” says Prof. Owen Skae, director of the Rhodes Business School in Grahamstown. “While it is important to understand customer groupings and market segments, the common denominator will always be an absolute commitment to customer service.” 

A further challenge when dealing with the government or big businesses is that excellent customer service alone will not boost the entrepreneur’s chances of success. With these two types of customers, according to Skae, the small-business owners may have to go through a tendering process. 

“South Africa still has a long way to go in terms of government and big businesses buying from smaller businesses,” says Skae. In Japan, for example, government is obliged to pay smaller companies ahead of other suppliers and with a tighter timeframe, he says. “Tendering in South Africa can be intimidating and costly.”

Delivering a promised or contracted product or service could be critical in securing a long-term relationship with either government or big businesses. Finding the correct pricing of the goods and services to be sold is also essential, according to him.

“It is very important for the potential entrepreneur to familiarise him or herself with the quantity of products or services that a customer wants and to get the ballpark value that will lead to a competitive price,” says Skae. “Getting this right could be the big break you want or, if you get it wrong, it could be your demise.”

One of the main reasons why smaller companies go bust is that they overtrade. These companies tend to grow too fast, making a profit while not generating enough cash, according to Skae. Problems then arise when the business owner realises they can no longer afford to pay their suppliers. On the other hand, if only one debtor fails to pay what they owe, that could be the firm’s death blow.

When potential entrepreneurs seek new business, they need to be wary of over-promising and under-delivering, he says.
“Impeccable service is paramount when selling to individual customers as word-of-mouth advertising is very important,” says Skae. 

The internet has reduced the cost of traditional market research, according to him. In addition to utilising the web to do research, observing other businesses in action is another powerful tool in scouring the market.

“Observing people making their purchases, how they compare prices and decide to purchase could be valuable to your market research,” he says. He adds that trade publications, covering each different sector of the economy, are often a valuable source of information.

Skae advises that every potential entrepreneur should have a strategy, especially a business and marketing plan. These plans should be used as a guide for the entrepreneur, especially in difficult times and not necessarily as a tool to get bank funding.

This article originally appeared in the 17 September 2015 edition of Finweek. Buy and download the magazine here.