Introduction
Dave intends to start a painting business. He has some experience working for other painting firms while in college. He has also read extensively about this industry. He feels confident he can now run his firm. The company will focus on painting residential houses. It will be based on Dave’s home. This will help reduce his tax liability as he can claim part of his house rent as a business expense. Secondly, residential rent is cheaper than business premises rent.
Dave has collected some data regarding his prospective income and expenses. Income is based on the estimated number of homes in the area and approximate fees for a paint job. He has also prepared a list of expenses he expects to incur during the year. The objective of this case study is to determine how viable Dave’s business idea is. All the facts provided in the case will be considered.
Analysis
This analysis shows the total Market Revenue and Dave’s estimated share of this revenue.
The total number of available jobs is obtained by first summing up all the homes in the area. The result is 66,143 homes. However, Dave estimates that only 1/3 of all homeowners will initiate a painting project in any given year. Thus, potential jobs are 1/3 of 66,148. The result is 22,048 jobs.
The external environment includes competition. Dave estimates that there are 100 painting companies in the neighborhood. Each of these companies will be competing for available 22,048 jobs. Assuming it is a perfect market, such that each company gets an equal number of customers, Dave will have 220 jobs to work on during the year. However, this is an unrealistic assumption, as there is always a market leader.
The estimated revenue per paint job is $1,700. Thus, the total market revenue is 22,048 jobs multiply by $1,700 per job. The result of $37,481,033.33 is the total available revenue for the industry. On the other hand, assuming Dave gets 220 jobs; his potential total revenue will be 220 multiply by $1,700. The result is $374,810.
At first glance, it seems that Dave’s business is sustainable for the first year. His estimated expenses are only $80,000 versus an estimated revenue of $374,810. Dave is looking to make a profit of $ 294,810 in the first year.
SWOT Analysis
Dave has two major strengths. He worked for a national painting franchise. This allowed him to acquire several months of experience. It is very important to have experience in an industry before setting up a business. Secondly, he intends to set up the business in his home area. He can convince some of his neighbors to be customers. Also, he is well placed to know the best areas to look for paint jobs.
The major weakness is the lack of sure statistics. Dave as some information, but none of this is verified. This means that he could be making serious business decisions based on false data. He needs to invest in obtaining correct market data before investing.
The biggest opportunity presented in the case is the number of homes in Dave’s surrounding. Each of these homes represents a potential customer. All Dave needs is to create a niche and market his services properly. Dave also has the opportunity to set up shop in his own home. This is a privilege available to a few business owners. This makes his rent expense relatively low.
There are 100 other painting companies in the area. All these competitors are a threat to Dave’s startup. Some of these companies have been in the market for many years and already have brand equity and loyal customers. New customers would also be likely to choose a company, which has been in the market for many years as opposed to a startup. Dave needs to anticipate how the established companies will react to his entry and plan accordingly.
Adjustments
Dave needs to adjust his assumptions to be more accurate with Market Revenue information. First, he needs to separate the number of homeowners who execute their painting project from those who hire companies to paint their homes for them. This will reduce the total number of available jobs.
The average pay for a paint job needs to be revised. There are several types of paint jobs. Some involve renovating the whole home while others are restricted to one or two rooms. Dave needs to establish how many full renovation jobs are available versus small jobs. Next, he should split the average revenue per type of job. It is likely that in the first year, Dave will find it easier to secure the smaller jobs as he builds a customer base.
The assumptions on market share also need adjustment. It is not realistic to assume that all market players will have similar jobs. Dave needs to establish who the top industry players are and compute what percentage of the market share they control. It is normal to find that two or three firms control over 50% of the market, yet there are 100 industry players. It will be difficult for Dave to secure even 1% of all jobs as a new entrant. Realistically, he should count on a maximum of 70 jobs for the year.
Dave has estimated that his startup expenses will be $80,000. This seems to be on the lower side. His advertising expense is only $4,000. A startup needs to invest a lot in marketing to get consumers to know they exist. Dave should double this expense to at least $8,000 or $10,000. He should also make provision for a third employee in case he needs one. Painting work is labor-intensive. Dave needs to make sure he finishes his jobs on time to maintain his customers’ satisfaction.
Recommendation
The assessment above shows that Dave’s idea is viable. He has strengths and opportunities he can exploit to do a successful business. However, Dave needs to beware of his weaknesses and threats, which could jeopardize his business. I recommend further research into the market dynamics before setting up shop. Dave should also consider revising his expenses upwards. Particularly, he needs to invest much more in advertisement and marketing.
Executive Summary
Dave has some experience working for a national painting firm while in college. He now plans to open his painting firm. In preparation, he has collected some data regarding his prospective income and expenses. The total potential jobs are 22,048. Assuming it is a perfect market, such that each company gets an equal number of customers, Dave will have 220 jobs to work on during the year. His potential total revenue will be $374,810. At first glance, it seems that Dave’s business is sustainable for the first year. He is looking to make a profit of $ 294,810 in the first year.
The SWOT analysis summarizes Dave’s Strengths, Weaknesses, Opportunities, and Threats. His major strength is the experience he acquired working for the painting franchise. The weakness is a lack of sure statistics. Dave has some information, but none of this is verified. The biggest opportunity presented in the case is the number of homes in the surrounding neighborhood. Each of these homes represents a potential customer. There are 100 other painting companies in the area. All these competitors are a threat to Dave’s startup.
The assumptions made need adjustment to make a realistic business case. Dave needs to separate the number of homeowners who execute their painting project from those who hire companies to paint their homes for them. It is not realistic to assume that all market players will have equal jobs. He also needs to establish who the top industry players are and compute what percentage of the market share they control. His advertising expense is only $4,000. A startup needs to invest a lot in marketing to get consumers to know they exist. Dave should double this expense to at least $8,000 or $10,000. In conclusion, this is a viable business idea that needs some more research before execution.