Starting a Painting Business

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Table of Contents

Introduction
Analysis – Identify Issues and Discuss
Recommendation
Reference List

Introduction

In this case example we are presented with Dave Valdon, a local of Maple Ridge within British Columbia, who is planning to set up his own painting business to service the local neighborhood of Maple Ridge, Pitt Meadows, Port Coquitlam and Coquitlam.

Dave has a considerable amount of experience in the home painting industry due to his previous job as a part time painter during his summers while attending college at the same time.

However, Dave has to contend with 100 local painting companies that also service the areas he is attempting to penetrate and at the present, he is uncertain regarding the competitor ratio per area, and the actual amount of homes that are going to request his services.

As such, this case study report will attempt to analyze perceived issues with the business that Dave is attempting to set up. This will encompass issues related to market saturation, estimated yearly income, and the possible amount of consumers per area.

It will also include an analysis of target markets and finally the development of recommendations in order for Dave to meet and exceed his target goals.

Through this paper a better understanding of the issues of the case will be developed resulting in a proper evaluation of the problems and issues related to the establishment and development of Dave’s painting business.

Analysis – Identify Issues and Discuss

Current Saturation of Competitors within the Service Area

One main issue that has been identified by this report is the current level of saturation of rival painting companies within the same area that Dave wants to operate in.

Based on the case estimate of 1/3rd of local residents initiating painting projects within a given year, this results in the following case estimate regarding the number of customers per area within a given year:

Maple Ridge: 6621

Pitt Meadows: 1165

Port Coquitlam: 9044

Coquitlam: 5276

The total number of customers within a given year is thus estimated at 22,106. Taking into consideration the number of estimated painting companies within the area (100) as well as Dave’s own company (1) this results in an allocation of 218 homes per company within the neighborhoods that have been stated with the case.

Since Dave estimates the average cost of a painting job is $1,700 per home, this results in an allocated amount of $370,600 per company within a given year.

Other Issues

While such an amount is considerably above Dave’s 1 year cost estimate for his business, the following factors need to be taken into account as well:

Consumer patronage of existing painting companies within the area

– As seen in the study of Blankertz (1951), consumer patronage of existing brands and services needs to be taken into consideration when attempting to penetrate new markets (Blankertz, 1951). Pandit & Chari (2012) explains that if a consumer is already satisfied and happy with a particular product or service, they would be unwilling to shift unless a new external factor presented itself (i.e. cheaper prices, better quality etc.) (Pandit & Chari, 2012)

Saturation of painting companies within select neighborhoods

Another problem with the case is that there is an unverifiable amount of market saturation for companies that focus specifically on provisioning painting services for select neighborhoods. This creates 2 possible scenarios: the first is that target neighborhood that Dave would attempt to enter already has a considerable saturation of companies servicing it resulting in a lower rate of income.

The second possible scenario is that the neighborhood that Dave would attempt to concentrate his services in has a low rate of saturation which would enable him to gain more customers. As such, it is important to take into consideration the individual levels of market saturation per neighborhood in order to determine which area would be the best to penetrate.

Forecasts and Financial Data

For this project it is anticipated that the venture that the painting company of Dave will generate up to $370,600 in sales within a single year with a growth rate of 10 to 15 percent in the number of homes painted within a period of 3 years.

This assumes that within this given period of time no possible situation may arise that could result in a drop in consumer demand within this particular period. Based on an examination of costs which arise with doing business, associated costs for the company consist of the cost of equipment and supplies ($25,000 within a given year), corporate taxes ($15,000), advertising ($4,000) and the percentage that goes towards rent ($2,500).

This takes into account that the first month of doing business will actually be a loss for the company due to low sales rates and the amount that needs to be paid into corporate taxes, equipment/supplies and various associated fees. The highest cost for the business is the wages paid per month for the additional employee.

This rate takes into account aspects related to health insurance (as mandated by law), retirement payments and other such expenses related to hiring an employee. Overall it is anticipated that since there are two employees in this venture both will receive $30,000 per year out of services rendered.

Based on this it is anticipated that a return of investment for this particular venture (taking into consideration the time and effort required as well as individual taxation on income) will take 1 year.

Year 1 estimate along with costs

Summary of Financial plan
Annual unit sales	218
Price P/Unit	$ 1700
Variable cost P/Unit (production and sales)	$ 250 per home
Fixed costs (machine rent, maintenance etc.)	$ 25000
One-time start-up costs (equipment, marketing, legal, etc.)	$ 100,000
Working capital required (receivables, inventory, etc.)	$ 14,500
Estimated Annual Gross Revenues and Income:
Annual revenues	$ 370,600
Annual variable costs	$ 54,500
Annual contribution margin to tax	$ 15,000
Break-Even Point
Contribution margin per unit	$ 1.78
Annual break-even quantity	$ 100,000
Ratio of break-even to expected quantities	Above 200%
Starting-up the business:
Total up-front funds required	$ 34,500
Additional units to cover up-front funds	$ 1,000
Break-even quantity with up-front funds	$ 100,000
Financial Performance
Payback period for start-up funds (in days)	375
Annual return on start-up investment	230%
Variable cost to price ratio	35.3%
Contribution margin ratio	58.0%

Since Dave is going to be establishing this business from home and will be utilizing equipment that he already has on hand (i.e. his car) most of the costs that have been indicated so far are within normal parameters.

The main problem though lies with the equipment and supply expenses, if Dave is to achieve the estimated 218 homes painted within a span of 1 year, if the current estimates regarding the division of work is to be believed, then expenses for equipment and supplies has to exceed $2,500. $2,500 is simply not enough to be able to buy all the paint and paint brushes needed to even get through half the homes (Gilbert et al., 2012).

Thus, the budget needed has been revised to $25,000 per year with an estimated $250 cost per home due to expenses related to gas, equipment and employee salaries.

Alternatives

The decision that must be made with the most urgency is the choice of area that Dave must concentrate in to initially establish his business. While this case analysis has shown that 218 homes per company is the ideal scenario when it comes to fully satisfying the needs of consumers.

The fact remains that it is unlikely that Dave could meet such a target in an area that is fully saturated with competing companies who target the same market segment. Maple Ridge in particular only has 6,621 homes per year that could potentially avail of Dave’s services.

However, given the level of market saturation where it is uncertain how many companies operate within a single area, the best possible course to take would be to target a location with a higher density of consumers so as to limit direct competition with other, more well established painting companies (Chatterjee, 2013).

Based on the data it can be seen that Pitt Meadows and Coquitlam are not ideal locations given their lower consumer density, however, Port Coquitlam with over 9,044 potential homes to be painted seems to be the best location where Dave can concentrate is marketing operations and business offerings.

This is in direct contrast to the amount of homes within Maple Ridge that has an availability of only 6,621. Given the larger population of the area, this presents more opportunities for Dave to gain a larger consumer base.

This is not to say that he should not attempt to service the Maple Ridge area, rather, a better approach would be for him to divide his time between Port Coquitlam and Maple Ridge in a 70 -30 ratio with the majority going towards Port Coquitlam. This way he covers all his bases and is able to maximize his exposure to the necessary target markets.

Recommendation

One recommended action that Dave should implement is to hire more than 1 more person in order help out with the business. The reasoning behind this is quite simple, if the estimates of the amount of homes per company (i.e. 218) are accurate, this would mean that Dave and his employee would need to paint around 1 home per day in order to reach the $370,000 income threshold.

Not only that, it is also possible that the amount of orders for homes could be breached with Dave possibly reaching an estimated 300 homes per year. With such an amount the business would need to paint at least 2 homes per day in order to properly satisfy demand for the service.

Taking this into consideration, an additional $30,000 to hire one more person is well within the $370,000 estimated income threshold and would enable Dave to insert proper day off periods for his employees since more workers equates into orders being completed that much faster.

Reference List

Blankertz, D. F. (1951). CONSUMER PATRONAGE OF A PARENT AND NEW BRANCH STORE. Journal Of Marketing, 16(2), 152-157.

Chatterjee, S. (2013). Simple Rules for Designing Business Models. California Management Review, 55(2), 97-124.

Gilbert, C., Eyring, M., & Foster, R. N. (2012). Two Routes to Resilience. Harvard Business Review, 90(12), 65-73.

Pandit, N., & Chari, V. (2012). Innovative Business Development Model: The Diasporic Dimension. Advances In Management, 5(7), 43-51.

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