D&R WEB DESIGN
AN EXAMINATION OF STARTING A WEB DESIGN BUSINESS
Ryan T Evans
David M Wolff
Dr. Juli-Ann Gasper
Creighton University
Finance 402 Financing the Entrepreneurship
April 8, 2002
Executive Summary
The following paper examines starting a web design business. To more effectively discuss the creation of such a business, the essay has been divided into three sections.
The first section, the costs of starting an Internet-based company, will examine the general aspects of starting a company. The topic is broad, but narrowed by focusing on a specific sector in the marketplace (namely, web design). The paper will discuss general startup costs, as well as, the structuring of the company.
The costs associated with running a web design business directly affect the businesss profits. This topic will be discussed in the second section of the paper. The essay will detail all of the different costs associated with business operations.
The third and final section is a discussion of the failure rates of online companies. There are many issues that are discussed relating to why online businesses fail. By examining companies in depth, the entrepreneur can easily see the differences between those who succeed and those who fail.
The essay concludes with an overall evaluation of the web design industry. By examining the three previously listed sections, conclusions are drawn about starting a web design business. These conclusions indicate that starting a web design business is not extremely attractive to the entrepreneur.
Enclosed at the end of this essay is a glossary. This glossary may be referred to by the reader for vocabulary definitions. Throughout the paper, several words are hyperlinked. These hyperlinks lead to a words definition in the glossary.
Table
of Contents
Executive Summary
Introduction ...1
What are the Costs of Starting an Internet-based Company?...........................................................................1
How Many Costs are Associated with Running the Business?........................................................................5
Why Do So Many Internet Companies Fail?....................................................................................................6
Conclusions ...8
Glossary 9
References.. .11
About the Authors ...12
Introduction
High Levels of Uncertainty + Low Startup Costs =
Creating a Web Design Business
The world is rapidly changing. A majority of this change comes
from advances in modern technology. Technology has accounted for many dramatic
changes in the way people have conducted business in the past century. Advances in technology seem to be occurring
more rapidly in recent years, with little sign of slowing in the near future.
Web design startup is a profession that involves designing and developing online solutions for a variety of different customers. Web design companies are primarily based online, so our study includes an examination of companies based on the Internet. As a new medium, the Internet has provided businesses with a new way to reach their customers. The world of web design is based and is solely dependent upon the Internet.
The market is recognizing the overpopulation of web design businesses. This is evident when examining all of the failed startups and unsuccessful online entrepreneurs. Even with a solid business plan, entrepreneurs cannot be guaranteed success on the Internet. By differentiating and determining a target market, an entrepreneur can increase his/her chances of success. The internet has been viewed as a medium for getting rich quick, but, in reality, this could not be farther from the truth.
The following essay describes the costs associated with
starting a business, the costs of running a web design business, and the success/failure
rate of companies of this nature. Web design startup will be shown to be a very
attractive, but risky venture for most entrepreneurs. Finally, conclusions will
be drawn about the emergence of such a company into the market.
Enclosed at the end of this essay is a glossary. This glossary may be referred to by the reader for vocabulary definitions. Throughout the paper, several words are hyperlinked. These hyperlinks lead to a words definition in the glossary.
What are the costs of starting an Internet-based company?
Knowledge of a sound business plan, good financial practices, good relations with employees, and good marketing are all good tools to have when starting ones own small business, however, they do not guarantee success. The goal of this section is to simply highlight the startup costs(#1) and the structuring implications for the Entrepreneur. The five startup costs that we will address are as follows: 1). Legal Fees, 2). Trademarks/copyright costs, 3). Equipment Expenses, 4). Accounting Fees, and 5). Operational Expenses
With regards to legal fees, it is important to avoid legal fees that can be avoided. Often times small business incur legal expenses that could have been avoided had the Entrepreneur planned better. The following exhibit shows exactly how high specific legal fees can be:
10 minute telephone consultation -- $25.00-$35.00
30-Minute Office Consultation ----- $75-105
Document Review -------------------- $180.00
Debt Collection ------------------------$150.00
Source: www.startupjournal.com
Unfortunately not all legal fees can be avoided, however, using basic analytical skills and being extremely careful when reviewing documents will contribute to avoiding spending money to recover from mistakes down the road. Many legal fees are incurred because individuals do not want to get in over their heads. Often times, lawyers can deal with lease agreements in order to create ways out. Some would suggest not worrying about the amount that is spent while getting the company started and the goal should be to get the business up and running to the desire of the owner. We suggest that the goal in this industry should be to minimize start up costs. Several strategies, that will be discussed later, can work to save money in start up costs. Too often individuals only think about the expensive start-up costs that apply only to their line of work. However, some of the major costs are costs that any business will incur during the start up time of the business. These costs include phone and cable installation. Searching for the best plan is time consuming but worth it in the end. It may be a better deal to have different phone and cable providers, while this would be more complicated, the amount of money saved would be worth it.
Software and hardware decisions must be made. It is becoming increasingly more popular to lease software and hardware rather than purchase it. We feel that this is a good idea because the computers and the software can be replaced with faster computers and updated software after a couple of years. The company will incur a great deal of fees with regards to marketing and presenting your company to your target market. Many mailings will be sent out to prospective clients. This will mean that laser printers that can print envelopes, postage meter, and copiers will be needed. Also, when the company may need a projection screen and a projector, both very expensive items. Also, if you are going to work out of the home, you may consider the different types of lease agreements as well as the costs that you will incur that you would not if you were able to work out of your home. These include paying additionally for water, gas, electrical, decorating fees, and furniture fees.
With reference to the starting the business guidelines, specific conclusions can be drawn in how to approach the web design. Starting with a good idea is essential. Several web design companies do exist so the key is to either find a new idea that is different than all of the other companies, or to find a different approach that would improve the web design business. Some examples would include, much lower costs. Lower prices. Lower prices can only be sustained by lower costs which means finding a cheaper internet connection or even inventing more advanced language may exist. Because this is more of a service than a product, finding a faster way is difficult. 24-hour support and website service is an option to improving the service that is being provided. The ideal web design company would begin with a unique idea rather than a desire to own a web design company.
With a service industry such as this, it would obviously be extremely beneficial to gain the business of a large company, however, this is a waste of time initially, especially with the web design company. Ideally, once established, this company would adhere to the needs of both large and small companies. Approaching small businesses or even individuals would be a much better approach in trying to gain business. Because of the economy being in a recession right now, and jobs being somewhat difficult to obtain, one idea would be to market towards college students looking to gain internships or full-time jobs. This would give the company an opportunity to perfect the service that will be provided. This is another reason why we strongly warn against this business adventure.
More and more business owners are doing their own websites. This is extremely practical because it allows them as much elasticity as they desire, and they can provide 24-hour support for themselves. Entrepreneurs are always coming up with new ideas and plans for their business, which is why many are finding that it is in their best interest to take a few classes and design the website for themselves. Within larger companies, technology departments now exist, eliminating the need for web design companies as well. Approaching college students is also not such a good idea because chances are that a class has required that the student design his or her own website.
Not fretting the technology issues may not completely apply to a web design company considering that most concern would be technology based. However, it does pertain in some facets. Before starting the business, it is key to have confidence in your product or service. One should not worry about whether or not the idea will take, because if it is a strong idea with a unique asset, it does have an opportunity to be profitable.
Building a network(#2) is obviously one of the most important parts of starting a business. In order to build a network for a web design company, it is important to first find out who the market is specifically. If the goal is to market to a small business, define what a small business is. For instance, maybe you will only market to businesses that create revenue between $150 thousand and $800 thousand per year. Another possibility would be to only market to financial institutions because you have a partner with a financial background. It is important to make sure that large amounts of people at least know that your company exists. If one were to only market to small businesses in Omaha, profitability opportunities do exist. The key is building the network.
Once this network is built, the web design company should constantly market.(#3) Seasonal cards would be a good way to market to small clothing companies. This reminds the company that they may need to advertise for a new season wardrobe. These cards should establish a good personal relationship. If you were to send a happy holidays card and the companys current web design agent did not, this could cause the owner of the small business to think twice before going with the previous web designer.
Do not hesitate to implement new ideas. Any new idea with a web design company can be a competitive advantage. (#4) Specifically if an idea that will save costs is thought of, time should not be wasted.
Starting a web design company will be frustrating. Contacting small businesses will mainly include them either flat out rejecting you or sending you in circles, not letting you get through to the decision maker. All you can do is to tolerate it and maintain a positive attitude. There are two practices that will make tolerating the avoidance and rejection much less stressful: 1. Have money in the bank and 2. Maintain good health. We all know that not having enough money personally is one of the most stressful things in the world, so make sure that you are not in the negative. Also, maintaining a healthy lifestyle and avoiding illness is also essential. In order to own your own business, you must be ready to give 110% all day long every day of the week.
Because of the fact that our business is web design and in fact an internet business, the area of copyrights and trademarks is extremely interesting. We would first have to pay thirty five dollars to do a global trademark search. We would submit our web page and URL at which point research would be conducted that checked for any problems or conflicts with regards to trademarks. If this is completed successfully and no conflicts are uncovered D and R Web Design would pay $135.00 for trademark, copyright, and We could then opt to spend an additional 165.00 in order to register with the US copyright office. $375.00 would gain registration to the US Patent & Trademark Office. The company would also have the option of paying $950.00 in order to be registered with the US Patent and Trademark office as well as with the European Union. While many see this as only a few extra bucks, we do not. It is areas such as this that we can save a great deal of money. For $750.00 we could get the minimum protection and have a lawyer take care of this. If our plans included massive growth within a short period of time, then maybe we would want international protection as well. When starting a business it is important to save where ever possible.
The company will obviously have other costs that are neither trademark fees nor start-up costs. This would fall under operating costs. These include monthly bills such as phone and internet, basic office supplies(ink for the printers, pens, pencils, paper, etc.) It also includes unpredictable costs such as having to have equipment fixed, and even problems in the economy that result in less business.
Structuring(#5) the company includes four basic components, these are: 1). Costs involved in partnerships 2). Type of partnership to build, 3). Creating a business plan, 4). Establishing goals.
An important decision before beginning the business is to decipher whether or not a limited partnership(#7), a partnership(#8), or a proprietorship(#9) would be best fitted for you. They all have their advantages and dis-advantages. With a proprietorship, you would be in total control of the business and would make all of the decisions. However, this means that you would also have to be liable for the entire company structurally and financially. With a limited partnership, partners and limited partners exist. Limited partners put forth money but are not allowed to make decisions in the running of the company. Partners both put forth money and decide how to run the company. IN a partnership, each individual in the partnership is treated individually as far as taxes are concerned.
In order for a company to get a strong start, it must have goals and a good strategic plan.(#9) You need to set goals. When we sat down and planned our company, we realized that we could not turn profits by the middle of the second year, so we decided that it would not work. There obviously will not be a constant inflow, so you may want to have projected earnings per month and then measure the volatility month to month. You could do this not necessarily in dollar terms but in terms of the number of projects which you hope to gain.
Five Market Forces
How many costs are associated with
running the business?
Once the business is up and running, we must plan for the costs that will begin to incur. A company must decide how much to spend on marketing. Depending on the type of company, several inexpensive yet creative ways exist in order to gain customers. As a young company, it would probably be unwise to use mass media as a form of marketing The nature of the web design business will be referral-based marketing. Your goal should have your work speak for itself. A possible marketing tool would be to conduct seminars. At the seminar, have the entire presentation be off of your website. This would allow you to show off your skills as a designer as well as market to those in attendance. These seminars should be free with a motivation to attend. Possible motivators include a free dinner, or a raffle. You are your first client, so how do you want your company to be presented? Having yourself, as a first client will be extremely beneficial because you will come across the problems that the customer may have and you will be able to respond better. Have confidence in your approach, if they ask you why you did it the way you did, be ready to tell them why it is the best way!
Profits from services are generally collected at the end of a project. This could potentially cause cash flow problems because projects are rarely completed in the scheduled time frame. In order to deal with this problem, it is first suggested that a down-payment be required. As far as the books are concerned, your company can borrow money based on account obtained that have not yet been completed. Another profit problem is cut-rate designers. Web design has turned into a commodity market. This presents a problem because designers try to undercut competitors and end up loosing money. Without differentiation, there is a constant price war. You must differentiate your product and your approach in such a competitive market.
Why Do So Many
Internet Businesses Fail?
Top 5 Reasons Internet Businesses
Fail: 1.
No
defined target market 2.
Little
or no website traffic 3.
Business
treated like a toy 4.
Website
not designed to sell 5.
No
differentiation
In order to
effectively evaluate why so many on-line companies fail, we must first
understand the reasons behind the failure. These reasons include, but are not
limited to, having no defined target market, little or no website traffic, the
business being treated like a toy, the website is not designed to sell, and the
inability to differentiate from competition. Internet businesses typically
stumble into the pit fall of believing that they do not have to define a target
market. They believe that their market is anyone with a computer. The second
pitfall is little or no website traffic. This is a crucial element for the
online business. They must market their business on and off line in order for
consumers to know about their site and their business, instead of just hoping
for people to surf to the site. Treating the business like a toy is easy for
online entrepreneurs to do. They forget that the Internet is not only an easy
way to make money, but that is a new medium for conducting serious business.
When a online businesss website is not designed to sell, then the business is
more likely to fail. The site must be designed according to the type of
business you run. For example, a bank doesnt want a flashy site, when all they
need is an easy to use functional site. For the web designer, this is the place
to show off your skills. Finally, businesses fail because of their inability to
differentiate from the competition. IN web design, it is hard for the
entrepreneur to differentiate because your designs are not limited to one
market or one type of business. The service you offer IS the same as your
competition, you just have to convince the client that you can complete the job
faster and more suited to their needs.
Many
newcomers to on-line e-business try to market their endeavor as though it is
their local brick and mortar establishment. Marketing for an on-line e-business
is not as simple as hanging out a sign, placing a few advertisements in the
local paper, handing out a few flyers, or relying on word-of-mouth to grow
their e-business. The web is a completely new ball
game with a completely new set of rules.
Marketing
for the Internet means targeting, in many instances, a global consumer base,
and any advertising must grab and hold a potential client/customer's attention
in just a few seconds as they surf from site to site. For the Internet, the
yellow page listings become major search engine listings and placing ads in the
local papers correlates to placing ads in e-zines and on
classified sites. Neon signs and billboards become banner ads on as many sites
as possible within your target market and etcetera. Internet business is a
faster pace and requires a marketing plan that matches that pace. Learning and
adjusting your marketing mindset to these new rules is crucial in having a
successful on-line business.
Technical
dysfunctions such as slow loading pages, code errors, and excessive downtime will have potential customers/clients quickly
moving on to the next site. Chronic downtime is the fault of your web server and beyond your control. However, it may become
necessary for you to change your server to one that offers better technical
support and service.
In
order to correct these problems, the entrepreneur needs to ensure that they
create a flawless website (a.k.a. the shop front). They need to have up to date
technology products to facilitate their business. They need to have trained
technicians that can keep their business up and running. This is so crucial in
the on-line arena because customers visit your company 24 hours a day, seven
days a week.
Many
entrepreneurs do not give their on-line business enough time to succeed. Many
feel the Internet is a get rich quick avenue, expecting to make millions
overnight. A web site is thrown up with little to no thought, a couple of
advertisements are placed, and then it is expected that the money will come
rolling in. When it doesn't, they move on to another venture, which also fails
because they make the same mistakes.
Whether
a business is on-line or off-line, it takes time to grow and succeed.
Traditionally, a business will succeed or fail within the first five years. The
estimate of five years is probably an unrealistic measurement for an on-line
business. The entrepreneur must plan on a shorter time frame for an on-line
business. On-line business should determine if they are successful within a
year or two. In the Internet marketplace, the entrepreneur will either succeed
or fail almost immediately based on the service they offer. If there is no demand,
the on-line business will suffer right away. It takes time, adjustments to your
original business plan with a marketing strategy in place, and perseverance to
having an on-line business succeed. If the entrepreneurs are not willing to
commit the time, the effort, and funds to designing and marketing their on-line
e-businesses effectively, more than likely, their e-business will fail.
One
example of a successful online web development house is
Juxt Interactive (www.juxtinteractive.com). They provide solutions to clients all
over the world. They are recognized as one of the leaders in web design. The
company has been successful because of a strong management team, good
marketing, giving back to the online community, and setting the standard for
new designs. Their management team has been together for ten years. They share
a drive to get things done early and to market themselves as much as possible.
The company gives back to the online community by hosting conferences on
design, writing books, and holding competitions to encourage new designs. They
continue to set the standards for excellent designs which helps their
recognition as a business. Other examples of successful online web design
companies are 2advanced (www.2advanced.com) and theVoid (www.thevoid.co.uk). Both businesses have unique designs to offer and lots of
marketing to improve their recognition in the marketplace.
Conclusions
As we have shown, the world of web design is incredibly uncertain. With high failure rates, the web design industry appears extremely unattractive. The entrepreneur can be guaranteed nothing when starting a web design business. Though there are some who succeed in the industry, a majority of businesses based online fail.
The web design field is incredibly new and fast-paced. The
Internet has accounted for success for some entrepreneurs. Web design can (and
will) continue to evolve as a potential business venture for some individuals.
The Internet and web design markets have changed dramatically in the past
century and we should expect even more change in the future.
The market has recognized the overpopulation of web design businesses online. This is evident when examining all of the failed startups and unsuccessful online entrepreneurs. Even with a solid business plan, entrepreneurs cannot be guaranteed success on the internet. By differentiating and determining a target market, an entrepreneur can increase his/her chances of success. The internet has been viewed as a medium for getting rich quick, but, in reality, this could not be farther from the truth.
By starting a web design company, the entrepreneur risks the extremely high rate of failure for online businesses. Entrepreneurs may find web design businesses attractive, but should avoid the market if they cannot successfully differentiate from the numerous businesses in the market and create a solid business plan.
Glossary of Terms
Bankruptcy what we want to avoid. When the market value of firms assets are less than the liabilities
Competitive Advantage an advantage that a business has because of something it does differently or something different it does.
Consulting the practice of working with clients to solve their problems and meet their needs.
Cookies - technique for creating and identifying an ID
Cost of Capital the cost of alternative sources of financing to the firm
Cost-benefit Analysis study of positives and negatives of a business choice
Downtime time when the servers are not running (your business in not open or online).
E-business any form of business conducted on the Internet.
E-zines online magazines.
Flash a programming language that is used for multimedia creations
Limited Liability
Partnership - the liability of a firm's owners for no
more capital than they have invested in the business.
Market to approach individuals needing your product or service in some type of mass form.
Network the contacts that a business has.
Partnership - a legal contract entered into by two or more persons in which each agrees to furnish a part of the capital and labor for a business enterprise, and by which each shares a fixed proportion of profits and losses.
Programming Languages the symbols used to create design on the web
Proprietorship - a business structure in which an individual and his/her company are considered a single entity for tax and liability purposes.
Self Liquidating Assets assets that can be converted to cash during the operating cycle of a firm
Self Liquidating Loan a loan that has an automatic repayment system worked into the loan.
Semivariable Costs costs that are partially fixed but still change somewhat as volume changes.
Server the computer that stores all of your companies information. Information is sent and received from the server.
Strategic Planning the way in which the company plans and develops its ideas, also known as the way in which the company tries to maintain competitive advantages
Start-up costs fees that are required at the earliest stage of a business. These costs are required to simply get the business operating
Structuring the way in which the business is set up, very important with respect to costs.
Tax Loss Carry-Forward a loss that can be carried forward for a number of years to offset future taxable income and perhaps be utilized by another firm in a merger or an acquisition
Technical Insolvency when a firm can not pay its bills when they come in.
Three Sector Economy government, households, and businesses make up the economy. Households supply the funds and businesses and government use the funds.
Tight Money indicates time periods in which financing may be difficult to find and interest rates may be quite high by normal standards.
Trade Credit credit provided by sellers or suppliers in the normal course of a business
Venture Capitalists individuals or groups invest in a new company in order to get the company started.
Web Design the creation, implementation, and techniques used to mold the look and feel of the internet.
Web Development House a company that contracts out their design services.
Reference List
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3. Career World Staff. (1999, April/May). High School Entrepreneur Starts Web Design Business. Career World, Vol. 27, Issue 7, pp. 10-13.
4. Fryer, Bronwyn. (2000, July). Incubator Hatchling. Computerworld, Vol. 34, Issue 27, pp. 64.
5. Howarth, Brad. (2001, February). Spike Radio Talks Up A Comeback. BRW, Vol. 23, Issue 7, pp. 64-67.
6. Internal Revenue Service. (2002, February). Partnerships Section. [20+ pages]. IRS.gov. [Online.] Available www.irs.gov/businesses/partnerships
7. Rosner, Hillary; Ladd, Donna; Braunstein, Peter. (1999, July). Machine Age. Village Voice, Vol. 44, Issue 28, pp. 42-45.
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About the Authors
David M Wolff is currently attending Creighton University in Omaha, Nebraska. He is a Senior and will be graduating in May of 2002. He will receive a Bachelor of Science in Business Administration degree with a Management Information Systems and Finance double major. In June of 2002, this author will be moving to Richmond, Virgina to run a New Horizons Computer Training Center. Related coursework he has completed includes Managerial Finanace, Advanced Managerial Finance, Investment Analysis, Principles of Insurance, Web Technologies, E-commerce, and Systems Design. He currently works as an intern in the IS department at Mutual of Omaha. His interests include learning new computer technologies and snowboarding.
Ryan Evans is also currently a senior at Creighton University. He too will be graduating in May 2002. Ryan will be receiving his Bachelors of Science in Business Administration with a Finance major. His plans for next year are currently undecided but possibilities include Jesuit Volunteer Corps, Peace Corps, and Americorps. His interests include biking and traveling. Ryans long- term goal is to become an FBI agent.