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... ows based programs sitting unsold on the shelf; sales seemed to be concentrated in a handful of hit software. Moreover, it was the practice of many retailers to sell newly stocked programs for fully set price only for 30 to 60 days, after which they were sold at a discount. With retailers holding excess inventory, it was not uncommon to see titles that originally listed for $ 60 discounted to the $ 15 to $ 20 range.
DFC Intelligence Research identified that retailers were most concerned with the difficulty of deciding what to buy and heavy price discounting due to increased competition. In 1994, retailers as well as direct marketers had become very careful in what they would stock. Buyers looked at three things when deciding which brands and titles to stock: the quality of the software, the amount of advertising the publisher planned to do, and the reputation of the publisher. But, as we noticed in 1990 s, such an entrance barrier can be easily overcome by a company that has already established its status and popularity in consumer electronics, such as Philips and SONY. The latter is, as Microsoft's president thinks, the biggest adversary in banking computer systems in the coming years. SUBSTITUTE PRODUCTS - The substitute products for commercial as well as scientific software are very limited and even obsolete, because no bank would use the old pen-and-paper software to make calculations.
Nevertheless, the marketing base is very narrow, since the companies that directly deal with banking will buy the banking programs. Also, only those research and development laboratories that are interested in the software and are willing to pay for such software will be willing to buy it (that is, they have to share their information with consumers based on the metric system). Since our business is relatively small and qualifies for the requirements of S Corporation, we decided to take advantage of the benefit offered by the IRS and register as an S Corporation entity. Benefits include the following: 1. When the corporation has losses, the S election allows the shareholders to use the losses to offset other income; 2. When the stockholder's tax bracket is lower than the corporation's tax bracket, the S election causes the corporation's entire income to be taxed in the shareholder's bracket, whether or not it is distributed.
This is particularly attractive when the corporation wants to accumulate earnings for some future business purpose. 3. As mentioned, a single tax on corporate income is imposed at individual income tax rates at the shareholder level. (The income is taxable to shareholders whether or not it is actually distributed. ) The business consists of 5 departments: advertising, marketing, financial, labor and sales department. All of them, except for labor department, are in the US. The corporate headquarters are in the US as well. 1. The marketing department prepares research for a particular product market niche in the United States, which has not been yet filled by the big competitors. After it has analyzed the supply deficiencies in the program system converter market, our main offers and areas of interest for the future will be anti-virus and anti-hacker software, rusticates, software that installs the euro conversion system on other programs (mainly financial), software attachment for Windows that automatically converts miles into kilometers, inches into the metrical system, Fahrenheit into Celsius, etc. , and financial software for on-line banking.
The marketing department constantly keeps an eye on changes in the market and new opportunities for success. 2. The advertising department is responsible for finding new customers and communicating the product offer to them. 3. The financial department is responsible for developing the budget for our new product offers, estimating the development cost and the gross sales for the first half year, finding ways for preferential tax treatment for our international transactions, establishing credit lines with the customers, long-term financial planning and control, auditing the departmental expenses, managing cash and currency exchange and general bookkeeping and tax processing. 4. Labor department consists of a few persons who are experts of the labor supply in Moscow. They keep in touch with the best technical Universities in the country, find the best students, and maintain personal contacts with more than two hundred independent programmers in the capital. When the order comes, they select the specialists who possess the specialized knowledge in the particular area involved and make an offer to them.
The best bidder gets the contract and usually prepares the program within a few days. Since the market is very competitive and the wages in general are low, we manage to reduce our product cost far below that of any other software manufacturer within the United States, while maintaining high quality level and customer satisfaction. 5. The sales department usually receives orders from a particular customer and delivers the program either via mail on a CD or instantaneously via the Internet. We accept the unpacked CD back within 30 days form the date the customer received it with a total money refund, but in view of extensive software pirating with except the unpacked CDs and refund the money only if the program does not work properly. The sales department also offers technical support on the telephone or via the Internet. In order to protect our product from pirate use, we have installed a system in our programs that send cookies to our every time that computer is logged on the Internet.
When unregistered, our programs automatically uninstall themselves within 48 hours. Typically, the commercial software market is a higher-margin "commodity" business that requires several layers of sales intermediaries between the manufacturer and the consumer - manufactured to distributor, to jobber, to electronic store or service station and to consumer. Fortunately, the Genesis programs are unique in that they have no direct competition due to their patented design, lifetime warranty, superior performance, and individual approach. With proper marketing, they can be sold directly to the consumer at very attractive non-commodity type product prices and profit margins. When we purchased the asset of Bank Compute Corp.
in October 1992, the company was selling 70 percent of its product through ads in men's "handyman" magazines such as Popular Banking and 30 percent through the traditional commercial electronics channels. The suggested retail price was $ 300 -$ 400 per program disk, which was the price, advertised in magazines, plus $ 2. 50 shipping and handling. There was no shipping cost for downloadable programs. One customer, a catalog company similar to Sharper Image had begun selling the product through its catalog at $ 310 per disk plus $ 5. 00 shipping and handling. After the purchase of assets, we raised the minimum wholesale price to $ 345 per disk with a suggested retail of $ 425 per standard program. Subsequently, the wholesale price has been raised to $ 431 per disk.
By the end of December, we have become the number five all-time best sellers for Sharper Image. Thanks to aggressive insertions of the catalog in almost every domestic airline magazine during November, Sharper Image sold over 823 disks. The advertising department is responsible for finding new customers and communicating the product offer to them. It analyses who the main users of our product would be and in what ways can we make ourselves known to them. Since our main customers are not individuals, but rather financial service companies, R&D and scientific departments, linguistic centers, etc. , we do not advertise extensively via TV or radio. Rather than that, we put our announcements in specialized newspapers and magazines, send offer packages directly to prospective customers, and exhibit our products on local regional trade fairs.
Genesis financial department is responsible for planing and developing of the entire companys budget and the overall financial transactions. It encompasses several important sectors that enable the whole functioning of the company to be efficient and profitable. The main concerns of the financial department are: planing and development of the companys budget developing budget for our new product offers funds (obtaining funds and funds management, collecting funds or funds crediting) auditing the departmental expenses general bookkeeping and tax processing. Being a small, newly established enterprise, fighting to strengthen its position on the market, Genesis prime concern is to work on a low-cost high-profit basis that in the same time will satisfy the needs and preferences of the company and of its customers as well. Therefore, the financial department puts a special emphasis on certain key-areas, which are considered to be of essential interest. Those areas are: long-term financial planning and control establishing preferential credit lines with the customers exploration and finding of favored tax treatment for the companys international transactions managing cash and currency exchange.
Working in a highly competitive industry such as the computer software business requires exceptionally trained employees, experts in the field of computer programming and computer networking. The demand for experts with that profile is constantly rising. Therefore, GENESIS is aware of the crucial importance of its existing cadre and is steadily striving to maintain the manufacturing department as a unique unit in the corporation. The cores of the department are four computer science experts from Moscow.
They have an enormous experience since they have spent almost half of their working life in the military industry, holding special positions related to computer programming and maintenance of sophisticated military systems. Also, they have widely spread net of connections with their former colleagues and students on the technical faculties all over Russia. Their prime responsibility is to establish and maintain personal contacts with computer programmers. The best technical Universities and the best students are their prime target for recruiting. As an addition, it is worth mentioning that only Moscow has more than 1000 highly educated and experienced programmers that are already working on software design and engineering projects. The essence of the manufacturing department is very simple: when the offer comes, Genesis' experts select the specialists who possess the specialized knowledge in the particular area involved and make an offer to them; the best bidder gets the contract and usually develops the program within a few days.
The manufacturing division views the cost containment as the best way for the company to achieve the overall financial performance objectives. Since the market is very competitive and the wages are low, but still higher than the average income in Russia, we manage to reduce our product cost far bellow that of any software manufacturer within the United States, while maintaining high quality level and consumer satisfaction. After the software is being prepared, our branch from Moscow sends it via mail, on a CD or instantaneously via Internet to the headquarters in Santa Rosa, Silicon Valley. In this way Genesis is flexible enough to meet special customer design requirements and to offer quick delivery.
The manufacturing department of GENESIS is especially proud of its manufacturing philosophy. We refer to it with the Japanese designation keiretzu, which means chain - connection. The key orientation of the keiretzu is the development of an entire network of reliable partners - that is experienced programmers responsible for software design and engineering. Enhancement of communication, satisfactory financial compensation and quality programs is the formula for success and opens the doors of our customer's vision for the future. Graphic Depiction of Keiretzu - Chain or Network Given our limited financial resources, we were not able to invest much capital in marketing. Similarly, we decided to avoid entrenched retail competition, which was essentially dominated (90 percent of the banking market and 78 percent of the research engineering market) by two companies: Microsoft and Compaq.
Because of the high-quality, patented design of our programs (which actually did work better than ordinary software), we believed we could sell directly to the consumer, rather than to the retail level. We investigated a concept in direct-response marketing known as "syndication. " Syndicates are third-party entrepreneurs who print ads in scientific and business magazines, and credit card billing inserts on the basis of nothing in advance and a percentage of sales. Thus, the up-front investment in advertising would be zero. Moreover, in the case of billing inserts, we would receive the bonus of an implicit endorsement by the credit card company, who themselves may be our customers.
Daring to raise the suggested retail price of the software from $ 300 to $ 355, the company forged ahead with this strategy in limited tests. The test conducted last year, proved extremely successful. In particular, cash flow was attractive, since more than 60 percent of the catalog test orders were charged on credit cards. The company thus received its payments within 5 days; through traditional retail channels the store would pay Genesis 45 to 90 days after receipt of the product.
Given the results of these tests, we believe the future of our company is promising. Accordingly, we began planning for the associated ramp-up, in expectation of sharply increased orders as we rolled out the syndicated advertising campaign. It was with these expectations that we sought $ 500, 000 in loans and equity. By early 1998, Genesis was apparently on the verge of enormous growth. Accordingly, the company needs capital to build inventory and finance the projected ramp-up.
In total, the management is seeking a $ 500, 000 investment: a $ 150, 000 term loan secured by all assets except inventory and receivables, a $ 75, 000 term loan secured by existing inventory, a $ 100, 000 revolving credit line secured by new inventory purchases and receivables, and $ 175, 000 in convertible, redeemable preferred stock. Bibliography:
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