BFA612 Assignment - Group written business report. Due date: Week 10
Can Chasing Small Customers Lead to Larger Profits? (ADRIANA GARDELLA, NEW YORK TIMES, 27 APRIL 2011)
Darren Robbins and a partner founded Big D Custom Screen Printing. In its third year, the company based in Austin, Texas, recorded sales of US$900 000 and made a small profit.
THE CHALLENGE: Should Big D start a similar, Tasmanian T-shirt printing business, to cater to a large range of customers in the music and art scene?
THE BACKGROUND Mr. Robbins, a former full-time musician who still plays in a band, was nostalgic for the multicolor tour shirts of his youth, which he described as “works of art.” He said the one-color shirts sold at today’s music and art shows appalled him. He was also disappointed by the quality of shirts created and said he could do better.
With that goal, Mr. Robbins and his partner, who worked for Capitol Records, invested a total of US$225,000 to open Big D. The division of labor was clear. “I was a natural-born customer-service geek, and he was a natural-born salesman,” said Mr. Robbins, who resolved to take care of the customers his partner brought in. “We wanted to be one of the big boys.”
As his partner traveled the country trying to win accounts, Mr. Robbins ran the shop, frequently declining business from potential customers who requested small orders. Mr. Robbins, 44, who has a background in ad agency account management, said that turning away business kept him up nights. He wanted every call to end with a sale.
By the end of its first year, Big D had grabbed a few big accounts — local video game and record companies that placed orders for 5,000 to 15,000 shirts. But when the shop was not cranking out large orders, it sat idle. Mr. Robbins said his partner feared that small orders would prevent Big D from handling bigger jobs should they come in. But given his ad agency experience, Mr. Robbins said he was used to demanding clients and short deadlines. “With effective scheduling, you can pretty much accommodate any customer,” he said. Following the lead of his competitors, he charged more per shirt for the smaller orders he did take.
THE OPTIONS: At first, Mr. Robbins and his partner agreed on strategy. With their industry contacts, they said they believed they could land accounts from major bands. Focusing on high-volume orders made sense to them in part because Big D’s suppliers offered a price break on large quantity T-shirt orders.
But the partners did not realize that most bands were locked in to long-term contracts for their tour shirts. Given that, Mr. Robbins started to wonder about the strategy of chasing down high-volume clients, particularly when he had so many smaller prospects knocking on his door. But, he said, his partner saw no point in accepting orders for one or two shirts. His partner continued to believe big orders were crucial to profitability and that he could best win those accounts by conducting in-office presentations for corporate prospects across the country.
THE DECISION: After a year in business, Mr. Robbins threw an anniversary party to thank his employees for their dedication. His partner, however, opposed the modest celebration because its cost meant the difference between breaking even and showing a loss on Big D’s first-year sales. This disagreement highlighted the increasing tension between the partners’ growth philosophies.
Determined to accept smaller orders, Mr. Robbins bought out his partner around the time of the party. The split was amicable, Mr. Robbins said, with his former partner breaking even on the sale and returning to the music business. And then the economy crashed. “Almost overnight, companies tightened their belts,” Mr. Robbins said.
At that point, he decided that no order was too small. He would find a way to take all business, even an order for a single T-shirt. He knew there would not be a lot of competition from the other local screen printers for the small orders. “I noticed they weren’t in a huge hurry to fit them in,” he said.
Big D began catering to those with small needs, including a Houston comedian who wanted 20 shirts. Once he made a decision to take all orders, Mr. Robbins reassessed his costs and determined that he could make a profit on the smaller orders, even without charging the significant markup that many of his competitors charged — a markup that effectively discouraged customers from placing small orders. Instead, Mr. Robbins lowered prices on smaller orders, bringing them more in line with the per-shirt price for large orders. Big D charges US$5 per shirt for 40 to 499 white T-shirts printed with one color, while the charge for an order of 1,000 or more shirts is US$3.50 per shirt. He was able to take this step and still make a profit because, regardless of order size, Big D’s costs to print the shirts were not that high. Because of the quantity discount, the company would still make a greater profit on its large orders, but Mr. Robbins said he decided to “be as fair as possible” on the smaller orders. His prices for one shirt, a “micro-run,” begin at US$25.
He also eliminated set-up charges, a common fee charged by printers, and put his prices on Big D’s Web site, mostly so he did not have to memorize them. “Many of our competitors make you come to them for a price quote, adding a day to the process,” Mr. Robbins said. He hoped that Big D’s transparent pricing would become another way for the company to differentiate itself.
“The competition — and my partner — thought I was nuts,” he said. However, Mr. Robbins said he understood his costs and could become profitable “without gouging people.” Big D’s US Custom printing become profitable within 24 months after Mr. Robbins bought out his partner.
In looking at the Tasmanian music festival-, pubs-, student events and arts and crafts scene, Darren decided that Tasmania may well present a viable investment opportunity. He advised you that he wishes to make use of a ‘Direct to Garment’ (DTG) printer, a pre-treatment machine, a heat transfer press and a tunnel drier. He wishes to keep his overhead expenditure, especially salaries and wages, as low as possible.
YOUR TEAM IS REQUIRED TO:
Assist Mr. Robbins in considering if a similar “as fair as possible” strategy and a “understanding his costs” approach will work in starting a Tasmanian T-shirt printing business;
1. Research the production and overhead unit costs associated with running the proposed Australian, Tasmanian based T-shirt printing business. You must obtain the costs through research of internet sources. Show the source of your information in all instances. Consider the capital cost of the DTG equipment stipulated by Darren. Due to time delays, distance from suppliers and urgency of design orders, Darren wishes to purchase the various mono colour shirts overseas and print the designs on the T-shirts in Tasmania. Consider environmental costs in your calculations.
2. Design a BASIC Excel worksheet template, using the information above and from other sources, to guide a 3-year pricing strategy (In Australian dollars but similar to the US model). The worksheet must clearly show if a Tasmanian T-shirt printing business is feasible, by becoming profitable, before the end of the 3-year period. Mr. Robbins, from his US experience, has suggested the following budgeted information as a starting point:
Sales Y1 - AUS$150 000, employees 2 (start of business)
Sales Y2 - AUS$325 000, employees 3
Sales Y3 - AUS$600 000, employees 5
Assume individual small-orders ( 100 shirts) make up 60% of the company’s business throughout the 3-year period. Limit the number of price-range columns in your spreadsheets to a maximum of 10. Mr. Because of his US experience, Mr. Robbins is willing to invest A$150 000 (including cashflow shortfalls) to start the Tasmanian business.
3. Write a business report, including an executive summary, advising Mr. Robbins on:
i. Your proposed pricing strategy, as evidenced by the Excel worksheet.
ii. Consider if Mr. Robbins’s suggested sales for the 3-year period are feasible. Suggest alternative approaches.
iii. Advise Mr. Robbins if an investment of $150 000 is reasonable considering the profitability of the business.
4. As an appendix, briefly reflect on the leadership style your group followed in coordinating the team effort. All members must sign the appendix electronically as proof of their contribution and to show agreement that all members contributed to the team effort.
Please note: All references must be clearly shown (At least 2 textbooks and 1 academic article). Refer the excel workbook to the business report - do not copy and paste sections of the excel workbook into the business report! Word count = 2 500 words including executive summary and list of references. The report and accompanying spreadsheet are marked strictly according to the marking rubric supplied. Information not supplied in the case should be obtained from industry sources and appropriately referenced.
The following web links may assist you in your effort: We do not expect you to contact equipment and T-shirt suppliers.
http://www.nytimes.com/2011/04/28/business/smallbusiness/28sbiz.html?_r=1&ref=casestudies
https://boss.blogs.nytimes.com/2011/05/03/was-big-d-wise-to-pursue-small-customers/#more-39407 (click on 4 comments for additional insight)
https://blog.printsome.com/best-t-shirt-printing-technique/ (have a careful look at the cost of capital equipment vs setup costs for production runs)
https://dtgprintermachine.com/dtg-printer-roi/ (Thoughts to consider when analysing the investment)
https://gjs.co/equipment/methods/direct_to_garment_printing (Explains the DTG process and equipment)