It is not that complicated.
In our previous article, we covered what a joint venture is. In this article, we will be talking about the benefits of doing joint venture and how it is easy to be established. We will cover more on the how to establish joint venture in today’s economy in other section of this website. The benefits of doing joint venture far outweighs the disadvantage if done properly. The key word here is; if it is done properly.
Setting up a joint venture takes time, thought, planning, execution, follow through and closure. Even when the joint venture and deal arrangements may have come to a close, the partnership between the parties does not have to come to a end and can then move on to do more joint ventures as both parties now know each other better, have built trust, understanding and relationship.
Easy to establish
The first benefit of joint venture is that it is easy to establish. Usually when you hear about joint venture, your mind conjure up complicated legal framework, stacks of agreements, big corporations, high expenditure, highly complex business arrangements and so on. While that is true for big multi billion deals between major corporations, it often is not the case for regular businesses and professional practices.
Example 1: Let’s take mom and pop stand alone restaurant selling organic food: Organic Restaurant ABC First, let me list down the ways that Organic Restaurant ABC currently acquire their customer base.
- They depend on walk in traffic into their shop
- They run advertising on magazines and newspaper
- They run special promotions and put up posters and fliers around their area of business
- They get referral from past clients
- So on and so forth.
Spending on advertising does not always work
With the exception of referrals and walk in traffic, for this business to increase their business volume, they essentially have to put up resources for advertising and marketing via the various channels available to them that hopefully reaches their target market. I say hopefully because spending a lot of money on advertising does guarantee success. Many businesses have spent a lot of money to advertise in newspaper or magazines, pay-per-click or any other with high hopes but have only received minimal returns. Sometimes the responses does not even cover the cost of the ads and they make a net loss on the effort. With so much uncertainty of the results coming from increasing marketing spending, this strategy can be considered a risky bet if you will.
Is there a better way?
What other options are available to businesses such as Organic Restaurant ABC? One of the least explored and least understood option available to every businesses is that of joint venture. Let us look at a few ways on how this business can grow their revenue without spending a lot of money on risky advertising campaign. In this article, we will be covering 3 joint venture strategies that can be applied to this case study.
- They can joint venture with other businesses
- They can acquire leads and prospects.
- They can do a joint venture with an endorsement deal.
They can joint venture with other businesses
One of the easiest joint venture partnership that Organic Restaurant ABC can set up immediately is a joint venture with other businesses. They can either set up joint ventures with businesses who have:
- Complimentary products
- Competitive products
- Similar products
First, let’s look into detail what other types businesses that are selling complimentary products to Organic Restaurant ABC. For this example, we will use 5 of these complimentary businesses as illustration.
- Normal non-organic restaurants
- Fast food restaurants
- Cake and sweet shops
- Western cuisine restaurants
The first thing that Organic Restaurant ABC can do is to create a joint venture partnership with 10 of each of these complimentary business categories. That means 10 Normal non-organic restaurants, 10 Fast food restaurants, 10 Cafes, 10 Cake and Sweet Shops and 10 Western cuisine restaurants for a total of 50 joint venture partnership. Let’s look at the factors involved in the joint venture partnership between these businesses.
- They do not compete with each other directly as they serve different groups of customers
- Let’s say a customer calls one of the non-organic restaurants and requested for a luncheon event for “Love The Greens Club” for 100 people but specifically would only allow organic food to be used in its cooking.
- Now being a conventional restaurant, obviously they do not usually have organic food as their raw ingredient and would have to go out of their way to procure these produce.
- Because it is not a regular part of their business practice, they may have to buy these organic produce at higher cost than usual.
- Too add to the potential problem, their chefs may not be an expert in preparing organic food cooking which may ruin the dishes and create a bad image for the business.
- Due to so many potential problems that could arise, usually this non-organic restaurant would have just decline the business and tell the prospects that they do not serve organic food.
- HOWEVER, due to the newly formed joint venture partnership with Organic Restaurant ABC, they can now say, “Ohh, I’m so sorry but we do not serve organic food here. However, we have a partner who is very well known and has high ratings on Yelp (the food review website) that serves excellent organic food dishes. Would you like us to help you get in touch with them?”
- My educated guess is that the customer will more likely than not say yes to that request.
- The non-organic restaurant then proceeds to refer the business to Organic Restaurant ABC, and “Love The Greens Club” proceeds to have their luncheon there, and everyone was happy.
- But here is what would have happenned behind the scene:
- Additional Income: By referring the business to Organic Restaurant ABC, the non-organic restaurants have received a commission of 10% of the total bills for that event. This is money that they would not have otherwise received from their regular business so it is a windfall profit. In fact, had the joint venture not been in place, they would had to turn the customer away without any chance of making any money out of the opportunity.
- Acquired New Customer: As for Organic Restaurant ABC, they are happy to pay a part of their profits to the non-organic restaurant as a profit sharing venture. Without the referral, Organic Restaurant ABC would not have this opportunity to acquire this customer at all, and would not have the profits they have earned.
- Repeat Business: But further to that, Organic Restaurant ABC have now acquired 100 new customers who will someday return again with their friends and family to lunch and dine there again, thereby generating repeat sales and income. Assuming that they continue to serve top level dishes with a great pricing strategy, they will have the opportunity to continue serving this group of customers and their friends until they decide to stop eating organic food. This is also known as lifetime value of the customer.
- Reciprocity: Now let’s say the opposite occurs and someone enters the shop of Organic Restaurant ABC and requested for normal non-organic dishes. Organic Restaurant ABC will now be in a position to return the favor and also earn a cut of the revenue by referring the business back to the conventional restaurant. How’s that for leverage!
- They do not have overlapping products and services
- As each of these businesses serve complimentary but non competing products and services, it makes sense for them to refer their prospects to Organic Restaurant ABC whenever there is an inquiry for organic food.
- Of course there are other factors that these referees need to look into such as:
- Good Reputation: Making sure Organic Restaurant ABC is a reputable business that serves top notch organic food. The last thing that these referees wants is to refer their customers to Organic Restaurant ABC only to have them screw the customers and thereby damaging their own business reputation and potential future revenue.
- Track Record: Making sure that Organic Restaurant ABC has a track record of serving their customers with top notch service and have all customers leaving satisfied and happy.
- Risk Reversal / Recovery: If the customers are not happy with the products and services of Organic Restaurant ABC, there is some kind of risk reversal, or restitution or restoration protection offered to their customers to ensure that no permanent damage has been done to the referees business and reputation. In this example, it can be a steep discounts to total bill, or coupons or discount to future purchases, or anything that is suitable.
As the case study above clearly illustrate, the joint venture partnership between Organic Restaurant ABC and all the other partners are mutually beneficial.
The joint venture in this case is far different from the original image full of corporate jargon, tall files of legal paperwork, and complicated maneuvers done by major corporations. Sometimes, all it takes is a mutual understanding that is backed with a letter of understanding and a few simple agreements of the terms of conditions such as payments of commissions, monitoring, accounting, roles and responsibilities of each parties and so on.
Also in the example above, we used just one of the potential 50 joint venture partners that the example has established. Can you just picture the power and leverage that the joint venture has to increase Organic Restaurant ABC’s revenue if they can make all those 50 joint venture partnership work? Its like going to a fishing competition where you are the only one with 50 fishing poles while all the other competitors only have one.
These joint venture are easy to set up and cost very little money. Sometimes it just takes investment of time, effort and initiative from the business owner, or hiring a joint venture negotiator to make the deal happen.
Lastly, in the case study above, the risk to both sides of the partnership was minimal, but the upside was unlimited. That’s powerful. We will cover more examples on competitive and similar products in future articles.
Thank you for reading until the end. Please leave a comment about your thoughts and if you have any joint venture ideas that you would like to explore with us, please leave a comment or get in touch with us via our contact form or via Facebook.
Looking forward to serve you further.