Business Plan for an Online Advertising Company by Knowledge5

VIEWS: 275 PAGES: 22

									Business Plan For An Online Advertising Company

Contact Information:
95 Jackson Avenue Dallas, TX 63453 (325) 555-2642 jw325@myisp.com

This document contains confidential information. It is disclosed to you for informational purposes only. Its contents shall remain the property of Business Plan For An Online Advertising Company and shall be returned to Business Plan For An Online Advertising Company when requested.

This is a business plan and does not imply an offering of securities.

Table of Contents

1. Executive Summary Business Opportunity Product/Service Description 2. Company Background Business Description Company History 3. Business Plan For An Online Advertising Company

1

3

5

4. Services

6

5. The Industry, Competition, and Market Market Definition Primary Competitors Customer Profile 6. Marketing Plan

7

10

7. Financial Plan Investment Plan Break-even Analysis Liquidity Plan Earnings Plan Risk Analysis 8. Conclusion

12

20

Business Plan For An Online Advertising Company

1

1. Executive Summary
E-Commerce is one of the growing businesses. The research institute, Forrester Research, assumes that the online revenue will be more than $2219 billion up to the year 2006. Compared to other sales activities, the electronic contact to the customer is much more efficient. Broadband internet and other new media help to support this trend. The return on e-commerce advertising is about 20% higher than classical distribution. A company that provides advertising activities in this area for the customers can be sure to have a high demand with a strong growth. The goal of this start-up is the general operation of an online advertising company that offers different services through electronic means. New technologies will be an essential element to increase revenues and stay in the market. 1.1 Business Opportunity The e-commerce industry is one of the growing business segments that will have a high demand in the next few years. The development of new business strategies and solutions is one key element for new industry players to get market shares and survive in this highly competitive industry. Additionally, sound cost management is of critical importance for a solid stream of revenues. Big industry players, like Amazon, have shown that, even in a competitive market, growth rates of more than 15% to 17% can be sustained. Many businesses in the industry have failed to adjust their strategy when customer demands and environmental factors changed. The most critical failures in such times were significant problems with the technical structure, low capacities that did not match the demand from customers, unsatisfactory service, low marketing returns and management mistakes, especially in new companies. Therefore, the company will concentrate on these factors to optimize returns. The operation of an advertising business in the e-commerce industry that offers a range of advertising products and services is the core of this start-up. A strong focus of this business will be placed on the selection of new strategies. The number of services and products will be increased over time. The operation of this business requires a good knowledge of the e-commerce industry, as well as a competitive service concept to increase customer satisfaction. One central goal of the proposed business strategy is the development of a unique corporate identity. Such identity will create customer loyalty and help gain a competitive advantage. Therefore, it is planned that, in addition to the selection of services, a company design is developed. For this reason, the service around the offered services and the additional businesses is very extensive. It is expected that the costs for marketing can be reduced if the company is known by at least one percent of the typical internet user. The required investment for the proposed business is moderate compared to other companies in the industry. Technical investment is expected to be the main cost driver,

Business Plan For An Online Advertising Company whereas no other substantial investment in other assets is required. Depending upon the store capacity, the minimum required investment amount ranges between $25,000 and $30,000 in the start-up phase, based on a 14-15% revenue margin. This amount is well within the financial requirements observed for other comparable companies. 1.2 Product/Service Description The business will operate in the e-commerce industry segment with different advertising services and products.

2

Cross selling is planned to be one of the prime strategies in this business, since all products are targeted to serve a similar need and can easily be combined. Synergy in selling product across business segments is likely to boost earning further. It is also possible to reduce costs, if higher revenues per customers can be reached. Therefore, one goal is to keep the customers as long as possible. Free services and additional offerings are required to fulfill this task. Figure 1.1 shows the revenue mix across segments in the start-up phase. This projection is based on the expected strategic direction, investment amount and business environment. As the core business, the advertising service segment is expected to generate 80%, the largest share in revenues. The sale of products is expected to be another important generator of revenues which also helps utilize invested capacity.

Business Plan For An Online Advertising Company

3

2. Company Background
The goal of this start-up is the operation of an internet-based advertising company that offers different services depending on the demand of the customers. The focus of this business will be on the e-commerce segment. Additionally, the sale of services is planned to reach an optimal utilization of personnel and store capacity. An initial investment amount of at least $25,000 is required, which will allow the operation of an online business with 1 to 2 employees and different products. Sales revenues are expected to range between $120,000 and $150,000 in the start-up phase and the operation is expected to generate profits starting in the first or second business year. Because of the fast development of this market segment, it is expected that an average growth rate of 20% in the first few years can be reached. 2.1 Business Description Management is expected to have a solid knowledge of the offered services to influence the customers. The goal is to create an innovative business in which the customer experiences competent service over the internet. These aspects are core requirements to build customer loyalty. Repeat customers are expected to generate revenues of 50% and more. Although this strategy is likely to require additional investments, it is expected that revenues per customer will increase significantly and range above industry average. Furthermore, this strategy will provide a clear entrance barrier for prospective competitors if revenues can be increased through the specific item selection. The development and promotion of a corporate identity is another central task for management that has a significant impact on the success of the business. Given the homogeneity of businesses in this industry, the development of a corporate identity will markedly increase sales revenues and build a customer base. Furthermore, a corporate identity will support expanding the business to a larger international target market. Because of the sophisticated technical architecture, a detailed knowledge in this field is required. The management has to cover all critical elements that appear in this area. It is also possible that other firms deal with the technical equipment. 2.2 Company History In the start-up phase, the business is operated as a one-person-business. Support staff that is responsible for the technical infrastructure and the marketing activities is also required. In the second business year, 2 to 3 employees are required to cover the growing demand. Positive earnings will be possible in this stage. This set up carries a certain risk potential because of the high equity stake the manager bears and the personal and statutory liability assumed. However, this set-up preserves a high degree of flexibility in managerial decision making.

The number of personnel to be employed depends on the structural complexity of the

Business Plan For An Online Advertising Company

4

operations and the desired size. Figure 2.1 shows a break up of costs in the industry. It is expected that the target employee with technical knowledge and business experience earns a monthly salary of $2,000-$2,300, based on 40 hours per week. The sales and service area requires 2 to 4 employees on average. Due to illness and vacation times, in the long run an average of 6 permanent employees will be required after the start-up phase. With increasing sales and better utilization of employee work time, revenue margins will increase and thus costs per employee will decrease on average. With revenues ranging around $500,000, capacity utilization is expected to be around 80%. Therefore, a strong growth will be one key element of the business. During the start-up phase, a single person will attend to all necessary management task, coordinate employees and provide strategic direction to the developing business. Accounting, administrative and machine maintenance will be outsourced to an external partner, since those tasks can typically be provided at better rates externally. Sourcing and marketing will require one employee.

Business Plan For An Online Advertising Company

5

3. Business Plan For An Online Advertising Company
The available competence will used for service business activities that will generate large revenues. The demand for advertising and marketing services in the e-commerce industry shows a growing demand. It can also be seen that advertising services activities increase the revenue per customer. Therefore, different advertising services will be integrated in the business, based on the customer demand. In the future, a support based on other technologies, like cell phones, is considered. The following advertising services will be offered: advertising places advertising strategies strategic alliances marketing services

Business Plan For An Online Advertising Company

6

4. Services
One of the key elements of a successful business in the e-commerce area is the technical architecture that has to cover the whole process from the advertising strategy to the implementation. The aim is that this process runs with only a low support of the employees. This will minimize the costs significantly, reduces the risk of errors and problems, and will lead to higher earnings at the end. To do this, an electronic systems will be used. This strategy with sophisticated equipment provides a competitive edge against other e-commerce companies in the environment and is expected to generate an additional demand and the possibility for a price mark-up. To optimize the whole process, the number of sold advertising services will be analyzed over time. The key figure used as a benchmark for this process will be a margin of at least 15%.

Business Plan For An Online Advertising Company

7

5. The Industry, Competition, and Market
A careful analysis of the market and competitive forces in this industry is a key element in assessing the business potential of our project. This analysis will provide marketing- and sales data that are indispensable to develop the business potential optimally. The main competitors are comparably-sized companies with a similar selection of items and item groups. Since the planned project is of international scope, the competitive analysis will not only have to focus on the local market, but on a worldwide environment. The market and competition analysis will be based on the entire specified market. 5.1 Market Definition Figure 5.1 shows average growth figures in revenues of internet-based advertising companies during the past 6 years. The e-commerce and advertising industry shows a strong growth development with rates of more than 20% since 2001. For 2005, a growth of 25% is expected with a strong development in the first and last quarter. Because of the high number of bankrupts in 2002 and 2003, there has been a slower demand and a slower growth. Despite slowing economic growth in the US and Europe with a decreasing customer demand, the e-commerce industry underwent a relatively favorable development. This is especially because of the strong growth from different Asian countries, and also new business developments like auction systems and other technologies. This development could compensate the decreasing revenues in some regions. New and innovative business concepts also show high growth potentials, while growth rates of traditional wholesale businesses are below average. The significant growth of new business concepts is primarily due to sharp cost control and more efficient business strategies that accounted for higher revenue and earning figures. According to industry estimates, 35% of such innovative businesses gained from cross-selling activities between their business segments. Sinking prices of products and technical equipment, like computers and software licenses, have allowed the industry to partially compensate for slowing demand. The next two years will show a stronger demand in US and Europe, as well as an additional demand from Asia, that leads to an increase in total revenues from 20% to 25%.

Business Plan For An Online Advertising Company

8

5.2 Primary Competitors The competitive environment is primarily determined by the choice of item groups. The competition will be considered on an international basis. Figure 5.4 shows the size of businesses in this wholesale market segment, which also includes different products and services that will be sold worldwide. The numbers are based on average revenues of companies that run their business more than five years. It can be seen that the most companies have a revenue between $500,000 and $2,000,000. Larger companies have another structure. Therefore, they will not be seen as direct competitors.

5.3 Customer Profile The advertising products targeting a young and financially strong clientele. A possible segmentation to identify this group is income, as well social groups, which determines revenue and earnings per customer or total revenues and earnings. Segmenting the target market is a key element for the design of an appropriate marketing strategy. Figure 5.2 shows revenues by social group. Numbers are based on average sales per customer of a particular group multiplied by the member of individuals in the respective group. This gives total revenues per group. As can be seen, companies and business people, young people and students generate high advertising revenue streams, because these groups are the main user of internet-based businesses. Members of these groups are also in the future frequent internet user with a growing demand. Relatively higher, total revenues from this segment are smaller, because members in this group have a higher reservation against new electronic media. Figure 5.3 shows revenues by yearly income of private persons. The figure shows revenues generated per income group. Numbers are based on the average income per customer and the number of customers per income group. As can be seen, customers in the middle income bracket generate the highest revenues. High frequented low income groups, such as students, also generate relatively high revenue streams, although revenues per customer are relatively lower. The core marketing strategy will consider people with an average income between $20,000 to $80,000 as the key element. Groups with higher income will only have an impact if expensive goods are sold.

Business Plan For An Online Advertising Company

9

Business Plan For An Online Advertising Company

10

6. Marketing Plan
In the start-up phase, it is a central task of the marketing concept to establish name recognition and a unique trade mark. Therefore, corporate identity is one of the key elements of a successful marketing strategy. Later on, the strategy will primarily be targeted to gain new customers and create customer loyalty of repeat customers. Several marketing and sales promotion strategies are available in the e-commerce industry. Figure 6.1 shows different marketing elements and their use in marketing strategies, as well as their estimated potential success factor. The figure can serve as a direction for the planning of a marketing and sales promotion strategy. The numbers are based on typical businesses from comparable companies in the e-commerce industry. The online-marketing is the main element of the strategy. Two different approaches will be used. First, different web offerings from search engines to web portals will be used to collect potential customers. Second email-marketing will be used to find customers directly and to inform customers about new products and services. Other companies show that this type of marketing is used from about 90%. 85% see a success if this marketing method is used. As can be seen, printed advertisements target a large potential customer group, but at a relatively high cost. Printed advertisements in international newspapers and magazines are regarded as very beneficial in the start-up phase to attract a large group of potential customers and draw attention to the range of articles offered. Only 20% of businesses in the e-commerce industry use printed advertisements, because of the high costs and about 45% of this group regard this as the most beneficial form of marketing. Sales promotion strategies have temporary effects only. 38% of businesses use sales promotion strategies frequently and 45% of the users responded that this instrument is successful. Marketing alliances with other online businesses to generate cost savings and increase efficiency are used rarely. Only 37% of businesses have used these elements and 55% of these regard this instrument as beneficial. Direct mailings are a very efficient strategy that sends mailings to selected customers or business groups. But, this element is of low use. The use of marketing and sales promotions proceeds as follows: as a broad base to attract new customers, the strategy will include a combination of online-marketing activities together with special low/price offerings. The distribution of information about new products will be delivered to the customers. A limited use of printed advertisement will also be considered. Cooperation with other companies will be a strategy for the second and third business year.

Business Plan For An Online Advertising Company

11

Business Plan For An Online Advertising Company

12

7. Financial Plan
A sound financial plan is the key factor for the success of a business start-up. Investors and banks will base their funding decision on the information given in this plan. Besides a plan of the financial needs, this plan must insure that the business is always liquid and ultimately profitable. Since the sales and earnings projections in the business plan are based on expectations, the financial plan has to be revised and refined on a constant basis so that discrepancies can be uncovered and solved instantly. The inputs for this financial plan are based on 15 businesses of different size and market segments in the advertising and e-commerce industry, which serve as a group of comparable firms, as well as own estimates based on the planned business environment. Revenue estimates are conservative and expense projections include a cushion for unforeseen contingencies. The initial capital requirement is estimated to be at least $25,000. The investment is separated in technical equipment, products and further necessary equipment. The sales margin is expected to be 10-12%, whereby each business segment contributes differently to sales and earnings. The advertising service segment will have a share of 70%. There can be seen a growing demand that leads to a higher growth rate than the sales business. It is assumed that the advertising and service business will have constant shares in the future. The e-commerce development segment has the lowest contribution to sales in relative terms with 30% and given the low sales volume, the smallest in absolute terms with about 25%. Revenues from other activities will have an absolute contribution that ranges from 20% to 25%. In this field of business, the revenue margin will be about 25%. This is because of the low costs that are required. Therefore, it is expected to have a strong growth in this area. Figure 7.1 shows the source of revenues by segment during the start-up phase. Depending on the initial investment sum, cost and revenue estimates vary. Figure 7.2 shows the expected relationship of cost and revenues. As can be seen, the relationship is not linear everywhere, but costs decrease relative to sales at an initial investment of $25,000. This effect is due to the better utilization of capacities in personnel at rising revenues at constant cost. If capacity is fully utilized, additional personnel must be recruited. At an investment sum of $200,000, administrative costs are expected to return to a linear relationship of sales. At sales levels between $1,000,000 to $2,000,000, cost increase is as low as possible, relative to the additional revenues. The cost revenue relationship is important, not only during the start-up phase, but also for further expansion. Often expansion strategies are based on this relationship. Other industries are able to generate cost savings of 30-50% during expansion periods, while for the e-commerce industry this factor is close to 15%. At a specific size, this relationship reverses because administrative costs rise sharply. This affects small businesses most severely. The details of the financial plan are laid out in more detail as follows: Section 7.1 gives an investments schedule. This includes all investments necessary during the start-up phase. Section 7.2 gives a break-even analysis that shows revenues at the break-even point. Every

Business Plan For An Online Advertising Company additional sales revenue adds to profit and vice versa. Section 7.3 gives a liquidity plan. This plan is based on current cost and revenue estimates from Section 7.2. Liquidity must always be positive.

13

Section 7.4 contains a long-term profit projection for the first 4 years of business. The projection shows the critical amount of revenues at which the business is profitable and how profit develops over time. Section 7.5 provides a risk analysis. The risk analysis contains critical factors that may impact the financial numbers presented in this plan.

7.1 Investment Plan The investment plan comprises primary capital needs for the foundation and operation of an online advertising company with different electronic services. The plan also includes initial marketing and sales promotion expenses. The figures are based on a business with 2-5 employees and expected revenues of $350,000 in year 2-3.

Business Plan For An Online Advertising Company

14

7.2 Break-even Analysis The break-even analysis shows how earnings rise as a function of sales. The break-even point is the point at which revenues from sales cover total costs (fix costs and costs rising with sales). This analysis is important for the development of the liquidity plan. If the break-even point is not achieved, in the long run the business loses liquidity and may become insolvent. This requires that a critical amount of revenues must be generated. At a sale revenue of $200,000 and given fixed costs, the business will generate a profit. Fixed costs are estimated at $30,000 to $50,000 and variable costs at $150,000. At a realizable revenue of $350,000, after 2-3 years profits will rise to $70,000 pre-tax. This represents an earnings margin of 20% pre-tax and 16% after-tax. These estimates are realistic in this market segment. Increasing sales volume will increase pre-tax

Business Plan For An Online Advertising Company

15

earnings margins, but this development reverses when administrative costs begin to rise sharply. Up to a sales volume of $1,000,000, earnings margins rise to 22.5%, after which the margin decreases to constant 20.5%. Figure 7.3 shows at which critical sales volume the business generates a profit. This serves as a base for a pricing strategy. Additionally, the graph shows the amount of sales at which a marketing campaign can be run profitably.

7.3 Liquidity Plan The liquidity plan shows the amount of finances necessary to assure permanent liquidity of the business. The plan is based on 4 representative months of a typical business with 2-3 employees and annual sales of $250,000. Revenue estimates are drawn from a standard normal distribution.

Business Plan For An Online Advertising Company

16

7.4 Earnings Plan The earnings plan shows the results from ordinary operations. The plan is based on the first 4 years of business. Revenue estimates are drawn from a normal distribution with an estimated growth rate of 20 to 30%. Figure 7.4 shows profit over time.

Business Plan For An Online Advertising Company

17

7.5 Risk Analysis The risk analysis considers critical factors that may lead to a failure of the business concept. Such factors can involve failures during the implementation phase, as well as during operations. Such potential factors are ordered according to the probability at which they can arise. Shown is the key factor that led to the failure only. Data are drawn from questionnaires of 25 e-commerce and advertising businesses with comparable product offerings and revenue- and cost structures that went bankrupt during the last 3 years, as well as analyses of different research institutes. 1. Behavior of Competition: Due to low entry barriers, additional businesses can enter the market at low cost. Approximately 22% of insolvent businesses were driven out of the market by that competition. A better technical architecture, innovative ideas and concentration on core businesses are easy means for an entrant to gain a competitive edge. Another point is the importance of corporate identity, which will increase the revenue per customer in the short and long run.

Business Plan For An Online Advertising Company

18

2. The technical equipment has a sophisticated structure that can lead to lacks in availability. If the problems in this field occur over a longer period, it is possible that the demand decreases and this can, in the end, lead to bankruptcy. It is estimated that, especially in the years 2000 and 2001, about 18% of the internet companies that failed had problems in this field. 3. Personnel and capacity utilization: Often personnel capacity cannot be adjusted easily when demand slows down. Currently, information technology businesses have a capacity utilization rate of personnel of 75%, i.e. 75% of employee working hours can be directly credited to sales. At small businesses this value is often lower, which means that 25% of working hours arise without generating any further revenue. 16% of such businesses go bankrupt for this reason. Another point are the high investments in technical equipment that require a high utilization. Therefore, additional businesses are required to reduce fluctuations in revenue. 4. Liquidity constraints: Another frequent reasons for bankruptcy is insufficient liquidity. In that case, it is possible that all liquid funds are used to cover losses or that liquidity needs were planned too tight. To be able to flexibly react to changing liquidity needs, it is important that sufficient funds be planned, even during the start-up phase. Thus, 5-10% of the investment sum should be held as liquidity reserve permanently. 12% of insolvent businesses reported liquidity as the reason for bankruptcy. 5. Over-indebtedness: Many business are run on a small equity base. The majority of investments are funded by debt. If the business becomes unprofitable, debt obligations cannot be covered. Little more over 11% of insolvent firms reported over-indebtedness as the reason for going bankrupt. It is therefore important that a share of earnings is retained for debt service. 6. Insufficient demand: This is the most frequent reason that leads to business failure. This includes permanently low demand, as well as a temporary collapse in demand. Often demand estimates were too optimistic at the outset. Such failures might also come from external shocks instead of operating deficiencies. 9% of businesses with insufficient demand go bankrupt. 50% of these businesses report that once demand slacked, they did not react accordingly, because they believed that this phenomenon was only temporary. Since the expected frequency of customers during the start-up phase is still low, a critical success factor is to focus promotional effort so as to generate customer loyalty early on, which will help minimize the effects of demand fluctuations. This is also important for the future development of the business. 7. Macroeconomic Conditions: In a cyclical downturn, revenue expectations may not come in according to expectation. Although this factor does not affect the business in itself, it does have an impact on profitability, liquidity and leverage. Costs remain constant during such periods, but revenues typically decrease which affects overall profitability. 6% of all insolvent businesses report that they went bankrupt due to macroeconomic conditions, although the relevant indicators of the business looked healthy.

Business Plan For An Online Advertising Company

19

8. Wrong Business Decisions: Often wrong business decisions and difficult situations go unnoticed for some period, which can lead to a failure of the business. A critical and independent reflection of a decision are critical factors to determine the value of a management decision and evaluate the business' profitability. Studies have shown that many businesses fail in their start-up phase because of management’s inability to make sound business decisions, while once a business is settled, such mistakes are very rare. A critical management instrument is the ability to detect potential failures and problems. Certain key figures can help measure this ability and objectively determine a decision's chance for success. Small businesses should use such indicator ratios to assess their business outlooks. Figure 7.5 shows the relative importance of each factor for businesses that went bankrupt. The numbers are based on the most relevant reason that triggered bankruptcy, but not the reason responsible for bankruptcy. External factors that changed the competitive environment and changing macroeconomic conditions were the most important reasons relative to internal factors.

Business Plan For An Online Advertising Company

20

8. Conclusion
The e-commerce and advertising business is an extremely profitable combination with growth rates of more than 50%. This is because of the lower costs, as well as lower risk, compared to the typical advertising business. The bigger market with an international scope is another advantage that can lead to a much higher revenue. The plan for the second year after the start-up phase is to offer the products worldwide. The relatively modest investment requirements and running costs (compared to a classical advertising business) provide a favourable argument, since external funds from banks becomes more difficult given that the risk aversion to finance such ventures has risen. A company with specific knowledge and innovative ideas has good chances to move into profitable market niches and run a successful business. Market conditions change constantly as do customer demands. This is the chance for businesses with innovative ideas and new offerings to secure a dependable customer basis. Service is a critical factor that can earn a competitive edge. This is also true for new trends in the industry to better control costs and increase efficiency. For a successful operation of an online advertising company, five factors are critical and central for the business strategy: The selection of advertising products and services will be based on return on investment, absolute investment, revenue per product and number of sold products. The process and the technical architecture have to be optimized to reduce costs and risk. The system should run in 98.5%. Problems in this field will have a high impact in customer satisfaction. The utilization of the technical equipment is critical for the long-term profitability because of changing margins and the impossibility to reduce investments in the short term. Therefore, the additional selling of advertising is a further segment of the business that is integrated in the sale of the whole business process. Internet-based services also support the utilization of the whole company. A critical factor in every industry is quality management. Better quality at lower cost increases customer satisfaction. Deficiencies in service quality can lower demand, while good service quality can help create customer loyalty. Cost management is a critical success factor for businesses in industries where margins are low. It is expected that an electronic based cost management system will reduce the absolute cost significantly. The average reduction will be about 8%.

-

-

-

-


								
To top