"We've got the merchandise and the store; all we need now is an identity."

Dwight Payne summed up the status of a new venture he just initiated with friend Gary Heap. Dwight and Gary reside in Santa Barbara, CA, where they attend college and pursue their mutual hobby of science-fiction book collecting.

"Dwight and I are really into science fiction," Heap explains. "We have pooled our book collection and have over 4,000 volumes - Heinlein, Van Vogt, Asimov, Bester, Moorcock, Pohl. You name the book; it's somewhere in our collection."

"Not only that," Payne adds, "we've got sci-fi magazines going back over twenty-five years. All neatly catalogued and indexed. I'll bet it would cost us $20,000 to assemble this collection today."

Payne and Heap decided that, at the end of this school year, they will dedicate the summer to getting a used-book store started in Santa Barbara as a means of supplementing their income year-round. They elaborate:

Payne: Gary and I figured that we might as well try to capitalize on our love of books and reading. Both of us are familiar with used-book store operations because we have haunted them so regularly in building our collection. We've been to just about every used-paperback operation in Southern California. A lot of them seem to be profiting.

Heap: My uncle owns a storefront near the University, and we made a deal for him to rebuild it as a used-book store; it's just about finished. He also co-signed an inventory loan for $4,000 for some start-up working capital. In exchange he gets 25 percent of our sales for two years. Not a bad deal, actually, since it is such a good location to serve the hordes of avid readers in the university area.

Payne: Just three weeks after lining up the building, Gary and I lucked into a deal in Ventura. The owner of a pretty good-sized used-paperback outlet put his merchandise up for sale to raise some quick cash.

Heap: We swung a good deal with him - over 10,000 paperbacks, magazines, and comics for $3,500, and $1,500 for all the shelving we will need. We borrowed the money from some fraternity brothers, rented a U-Haul truck, and carted the stuff home.

Payne: It filled the building about half way. We're currently cataloging the stuff. We got a great deal. Most of the books are in good shape and recent. It's a good mixture of fiction and nonfiction, including westerns, mysteries, gothics, biographies, and a few technical books.

Heap: We're virtually ready to open the doors, but we still haven't decided on what competitive strategy to use. We don't want to be just another used-book store. There are a half-dozen of those around town. We want to be something different in our image and in the way we operate.

Payne: We want to be able to attract customers based on our differentiated image and unique style of operating. We're looking to be something a little different. And profitable!

ADVISE DWIGHT AND GARY (There is no one right answer)

1. The marketing concept

• Suggest a marketing concept for the store, including a name.
• Who are the customers? What are they looking for?
• How will Dwight and Gary meet their needs? (Company image, policies)
• How will they get known? (Advertising, promotions, competitive edge)

2. Reality check

• Decide on days of the week and hours the store will be open.
• Estimate staffing required and hourly salary costs.
• Do Dwight and Gary really work for free?
• What is a reasonable expectation of customers per day? Average purchase per customer?
• What are pessimistic and optimistic values of these estimates?
• How much will they have to spend on advertising and promotion to meet these estimates?
• What will they pay, on average, for each book?
• How much can they get, on average, for each book?

Put together a projected (often referred to as pro forma) income statement. Relate the estimates developed above to monthly sales (pessimistic, expected, and optimistic), cost of goods, and expense amounts for wages and promotion. We should add 25% to wages paid for the payroll estimate, to account for taxes, sick days, etc. Debt service payments may be assumed to total $400 per month. Estimate rent and utilities and any other expenses that you feel might be incurred.

Find a break-even sales estimate, that is the value for sales that produces a Gross Margin just equal to Total Expense. When gross margin generated equals expenses, profit/loss is equal to zero; this sales level is called the break-even point.

Would you do it if you were they? Why or why not? What kind of a test is this where you can’t look up the answer? It’s an entrepreneurship test; learn to be comfortable with your best estimate.

(After many requests, I have decided to make available the spreadsheet that represents my approach to this problem, while reiterating that there really is no "right answer.")

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