Entrepreneurs do not love risk and express this dislike by devoting energy and brain power in determining risk and then deciding whether to proceed or not. Before they would abort, the smart Entrepreneurs would first look to minimize or eliminate the risk by Partnering, Sharing, Mitigating, Testing, etc. Analyzing the numbers can be a vital tool in this decision making process. Numbers are very precise and often can point one to the right decision. However, there are many other variables in play that make decisions very subjective and soft.
The interpreting of the numbers is as important as determining them. Id like to give you a real life story on how I completely reversed a decision by looking at the same numbers but in a different light.
When we were growing our watch business, which was in a very mature industry, we decided to pursue niche licensing with secondary brands. We knew we couldn’t get licenses like Disney, Coke, NFL because the guarantee licensing cost was too steep for us, and we were too small and new a company for these major brands. We pursued and acquired licenses like Wizard of Oz, Gone with the Wind, Betty Boop, Dilbert, and Precious Moments for watches. When we discovered the advent of musical watches, we focused on securing the Elvis Presley license as we thought they were perfect for the musical category, and it fit our customer base.
We were used to getting licenses with no or minimum guarantees ($5,000-$15,000). Sometimes we offered higher royalty rates for no guarantees. After considerable effort, we got to the right people managing the Presley licensing and were in fact offered world-wide rights. Our only problem was we couldn’t sell them on a lower guarantee than the $100,000 they were demanding. Here is where the number analysis comes in.
The royalty was 10% and with the guarantee, I figured that my breakeven was $1,000,000 in new sales to come out. This is the way I normally looked at the numbers in our licensing decisions. Before I rejected the Elvis offer, I had an A-Ha moment. If I looked at the Break-Even differently using the same numbers, I realized my breakeven was only $200,000 in sales instead of $1,000,000. Here is how my new outlook worked. The profit margin on the watches was 50%, so if I wanted to be sure I didn’t lose money in this deal, then the profit on $200,000 in sales was $100,000 (50% of $200,000) which covered the guarantee. Of course, if we only did $200,000 in sales, there would be no profits, but also no losses. With that risk covered, the next step was to look at the subjective factors, such as:
- Would having the Elvis watches get us new customers and would they also buy some of our other 200+ watch designs?
- Would it get us new distribution overseas as the license was world-wide and Elvis had a following in many large countries?
- Would it help us to a more prominent share of the emerging musical watch category?
- Would it also help us attract other licensors?
- Would it help motivate our Sales Reps?
The answer to all these questions for us was YES. We ended up with many new customers and distribution channels like collectables, musical retailers, overseas. It was a natural for Home Shopping in Japan. QVC and HSN were customers of ours, and the Elvis watch was perfect to run on the date of his birthday. It did raise our profile as a licensee and furthered our creativity quotient in the industry with some of our nifty Elvis offerings. The license was a success for us.
So, taking a different look at the numbers can bring you to different conclusions that take out risk and offer the opportunity for new profits.