Moneywise24 Personal Finance

We continuously hear about how people make unwise financial decisions, and how we rely too much on our emotions. We tend to think “this will not happen to me, I am a smart and educated person”. A documentary I saw yesterday demonstrated the exact opposite. Below, I would like to take the opportunity to recap two scenarios of yesterday’s documentary, and the results.

5 Euros now, or 40 Euros in six weeks

Different random people on the streets were offered a 5 Euro bill on the spot, or they had the option to receive 40 Euros in six weeks. Nearly all people chose the 5 Euro bill option. However, taking the 5 Euro bill option is the most unwise decision; 5 Euros is much less than 40 Euros. Even if people would have been offered 5 Euros per week for the next six weeks, the total would be only 30 Euros.

We humans are greedy people, which is largely programmed in our genes. First, shopping or becoming money makes us feel good; yes, our bodies produce endorphine, having a very positive impact on our mood. However, from a survival perspective we also have to take the opportunity when it comes by immediately, as this opportunity might not be available tomorrow. Although we cognitively know, that taking the 5 Euro note now is not the best decision, emotionally it is still the best thing to do.

Absolute vs. comparative amounts

It is very difficult to look at money from an abstract point of view; how much is 10 Dollars worth? For someone earning 4 Dollars per hour it is worth much more than for someone earning ten times as much. And what is 10 Dollars worth in China, or India, or South Africa?

Random people on the street were asked to take a pick from two possible scenarios:

• You are offered an annual salary of 100,000 Dollars per year whereas everyone else earns 50,000 per year.
• You are offered an annual salary of 200,000 Dollars per year whereas everyone else earns 300,000 per year.

Although a 200,000 Dollar salary is clearly higher than a 100,000 Dollar salary, most people still chose the 100,000 Dollar salary. The main motivation of the people asked was that it makes them feel good to earn more than everyone else… people were simply comparing themselves to others, in stead of making an objective decision and go for the higher amount.

The human mind is truly astonishing, and it takes some will and effort to truly make objective decisions, which are best for you. Still, humans are emotional, and probably it will never be entirely possible to turn them off.

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It is not that I don’t like marketing; on the contrary, I studied marketing myself, and I believe it is a great tool for presenting new and innovative products to the crowd.  But the principles of marketing go much further than simply informing the crowd of a product. One of the goals of marketing campaigns is to motivate people to buy the product, to compete with the competition, and basically to get the consumer wanting the product badly.

But we have to be honest to ourselves: how can a marketeer, or a campaign, make consumers want to buy a product? Is it not our own decision to buy or not to buy a product based on our own evaluations and intelligence? Yes, we do make the decision ourselves, but what is our decision based upon? Is it based upon our true, unbiased objective observation, or is it based on what others make us believe is an objective, unbiased observation?

Marketing has many ways of promoting products to consumers in one way or the other. Below, I have listed a few of these methods. The list may not be exhaustive, and I would welcome comments and suggestions on how to expand the list further in detail.

Creating the need for an emotional state of mind

How often do you happy families, women, men, children, laughing and enjoying themselves in commercials? Depending on the product, marketeers aim at associating a special feeling or situation with the product; on a subconscious level, it means that buying that product would lead to that special feeling. The people in commercials are overly good-looking, confident, smiling, and consumers believe they will get all that when they buy the product. Creating that feeling involves the images, but also the colors used, the music and the sounds, the setting and surrounding… nothing is left out.

This association of a state of mind, or emotion, with a particular product might not lead to everyone running to the supermarket and buying the product. However, having seen that commercial 25 times, what is likely to happen when you accidentally see the product somewhere in the store? Exactly, you immediately associate the product with that feeling, and in a sense your unconscious mind has been conditioned to do so; you are likely to buy that product, even if there is a better and less expensive alternative standing right next to it.

Professional recommendations

“This product has been recommended by…”
“Thousands of people have tried this product, and they say…”

Recommendations from specialists, institutions, or simply people on the streets are a powerful tool to creating the illusion that the product must be good and worth buying, since so many people are using it. Personal skepticism is less likely to occur, since we tend to trust recommendations from others.

Making the product scarce

If a product is scarce, it usually implies that it is either extremely valuable or highly wanted. Many commercials and advertisements create a situation, in which the product is characterized as being scarce. Think about the following statement:

“Buy now, only 2,000 samples left!”

Games with wording

Our own language is often used against us. Marketeers have the fine ability to play with words in such a way, that we give a meaning to it that benefits us most. A great example of this is the expression “saving money”, which could  mean any of the below:

• setting money aside for the purpose of not spending it (and usually gaining interest on it)
• spending less money than planned

The first meaning usually earns you money, while the second meaning still means spending money. In a commercial I saw in Germany, the following statement was made:

“Having saved 10 Euros means having earned 10 Euros!”

This is, of course, an illusion, since you could impossibly earn money while you are spending it. Still, hundreds of people line up at major discount events, buying loads of items they probably don’t even need. They feel good, since they believe they have actually saved a lot of money on computers, televisions, or high quality branded clothing. But what they forget, is that they have still spend hundreds of Dollars, which they might have otherwise not spent at all.

Doing the maths

Consumers are very price sensitive, and therefore companies try to make their products as financially beneficial as possible. When it comes to debt, some companies stated monthly interest rate, making them appear extremely low. Other companies promote a very low monthly fee for a service, which comes only with an annual membership and annual payment possibilities. Some stores might increase the price of their products a few weeks before they start promoting major discounts… sometimes the discount price is higher than the original price.

These are only a few examples of how marketing works, and the methods that companies and corporations utilize in order to make their products wanted. As I mentioned before, marketing is a great tool for the purpose of bringing products to the masses. However, we as a consumer need to be conscious of the fact that many marketing campaigns are manipulative in one way or the other, and that only we can make the right decision, that benefits our needs.

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I have to admit: on several occasions I have really thought about starting my own business. And in fact, most people I know have had the same thoughts. The thought alone made me do some investigations about what to do in the initial stages, and how to approach setting up a company. And one topic I have consistently encountered is the business plan; a good business plan is absolutely mandatory prior to setting up a successfull business. Writing an excellent business plan serves two main purposes for the upcoming entrepreneur:

1. The business plan forces upcoming entrepreneurs to think over each and every aspect of their future busines; it forces entrepreneurs to dig into every detail of their idea, from the basic concept to the market and market developments, the name of the company, legal issues, financing, competion, personnel, and to put them on paper. A great amount of new businesses actually go bankrupt because of flaws in the business plan, or the complete inexistence of it.
2. The business plan is an important tool for convincing third parties to do business with you, be it banks, venture capitalists, friends and family, or investors. It is a marketing and presentation document, without which any company or person is unlikely to do business with you or lend you money.

The form of the business plan is quite irrelevant, it may be made using Excel, a word processing program, or another program specifically designed for creating business plans. Whichever method you choose, each business plan should be clearly structured, and should contain the following information:

The Management Summary

The Management Summary is the final summary of your business plan. It is usually at the very front of the plan, and it is intended to sum up the most important information for managers, who may not have the time to read through the entire document. The Management Summary is usually written at the end, when the rest of the document has been completed, and should contain the most important key facts of the business plan. Additionally, the Management Summary should convince the reader why the business will be so successful based on these key facts.

Business Concept

The business concept should provide the opportunity, that you have thought over all the aspects of your idea, its products and services, suppliers, and the market. What is it exactly what you want to sell? What makes it unique, or why is it going to be successful? How or where did you get the idea, and why are you so passionate about it? Explain the idea as detailed as you can.

Have you already identified your market? Who will be your customers? Where do they live, what are their living habits, and which age do they typically have? Are they individuals or corporations? And last but not least, how is your product going to serve your customers, what benefits will they have, and how will it make their life easier? Why should these people actually buy your product?

Additionally, find out who will be your suppliers, and include it also in the business plan. At what price will you be buying goods and equipment, where are the suppliers located? Will you be using only one supplier or multiple suppliers?

Company / Organisation

A company can have different legal structures. What will the legal entity of your company? For example, in the U.S. a Limited Company (Ltd.) is a legal entity, so is a sole trader. Legal entities differ strongly per country, the best source of information is your local chamber of commerce. What are the pro’s and con’s of that legal entity?

Also describe the future workflow in your future company. If you need personnel, how much do you need, and what tasks will there be for them? Who will be reporting to whom? Will they be full-time or part-time employees?

Location

Your business will need a location, and often the location makes the difference between earnings or losses. Explain thoroughly why you have decided for a particular location. By doing so you should take into account the infrastructure, costs for telecommunication, heat, water, average salaries and wages, taxes, buying power, etc. Gather as much information as possible. Perhaps you have access to databases, which are able to provide this information.

Competition

Researching competition can be quite time consuming. As with the rest of the plan, be as specific as you can: who will be your competitors, and which are the most important ones? What is the market share of these competitors? What is their pricing policy, and their method for distribution? How will your competition probably respond to your market entry, and what differentiates you from your competitors, i.e. what do you intend to offer what they can not?

Employees

This section is a more detailed elaboration of the requirements of the future employees. What tasks will they be having, who will reporting to whom, and where will you get your employees? Additionally, which qualities do you find important, and which salaries will you pay to which employee? How about taxes? Where will you find your employees? Will you advertise in the local newspapers or perhaps online? How much do such advertisements cost?

Advertising

How do you intend to make your potential customers aware of your product? Will you advertise, and if yes, where? How much does this cost? Be as specific as you can, you may even already design your future advertising campaign and attach it to the business plan. This will show others that you have truly thought about your concept in the greatest detail, and that you are serious about executing your plan.

Opportunities & Threats

Opportunities and threats are aspects of the business which are ‘out of control’ of the entrepreneur, and should not be confused with ‘strengths and weaknesses’. An opportunity of threat might be a specific trend, governmental developments, changes in buying power or tax, specific actions of your potential competition… anything that you can not control directly, but which should still be taken into account. A well written opportunities and threats analysis demonstrates that you are focussing long-term , and you are taking each and every possibility into account.

Goals

Here you can define the goals of your business. Where do you want to go after setting up the business? Where will you be in 1 year, in 3 years, 5 years and 10 years? Try to quantify your goals as much as you can, for example by stating:

In 5 years time, the business should have a market share of xx%

In 3 years time, the annual revenue should be xx US Dollars.

Finances

Last but not least, you will need to write down the projected initial investments, operative costs, and projected reveneues and taxes as detailed as possible. There are many factors to be considered here, and there are many templates available on the internet which you can download for free. Additionally, perhaps the best first point of contact would be your local chamber of commerce; they might have templates available which are specifically customized for your market, or they might know where to obtain such templates.

Writing a good business plan of high quality will take up much time, but it is essential for your future business to succeed. Perhaps, the business plan will in the end even demonstrate that your initial idea is not feasible at all, or that the company would not make any profits. In that case, be happy that you found out during the planning phase and that you had a chance to abort, rather than setting up the company without a plan.

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