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Raising Cash from Customers to Fund Growth

How a small Pittsburgh company uses presales to source expansion capital.

In the past nine years, Esspa, a Pittsburgh-area day spa, has moved to a bigger space four times and more than doubled the size of its latest spot. This year it's planning a second location. But it has never taken out a loan or brought in investors. To raise the cash for its expansions, it has turned to its loyal customers.

"We looked at all the hurdles and hoops put in front of us to apply for a loan, and it didn't make sense, so we've had to get creative," says Esspa's owner, Scott Kerschbaumer. The solution was his customer database, which has grown through the years to 9,000 people. Appealing to this group, he says, "is easier than filling out SBA forms. I would rather have 9,000 people than one underwriter deciding whether I get this money."

The strategy he uses is a variation on "preselling," a fund-raising method that typically involves collecting cash from a group of supporters up front in exchange for a product or service that they'll receive later. Often the money goes toward developing a new product. The strategy has gained currency on crowd-funding websites such as Kickstarter. Kerschbaumer is tweaking the strategy by selling existing services to be redeemed later and using the money to expand.

Related: Crowd Funding -- From Friending to Financing

His main tactic has been an annual two-for-one sale the morning after Thanksgiving, the traditional retailer kick-off for holiday shopping known as Black Friday. For a limited time, the spa matches whatever size gift certificate a customer buys, be it $50 or $5,000, with a free gift certificate of equal value. In 2010, the event brought in $94,000, up from more than $82,000 the previous year. The business plans to put the sum primarily toward opening a second location in 2011.

Interested in tapping your customers to fund your new or growing business? Here are lessons Kerschbaumer has learned over the years about how to do it right.

1. Build a community.
Every two weeks, Kerschbaumer sends an e-newsletter. It includes a bit of personal information, such as news of a trip he and his wife have taken. Then he always thanks his customers. "I say that if it wasn't for them, we wouldn't have been able to go to New York to see that show."

He includes updates on improvements or specials and asks for feedback. For example, when considering moving the start time of his sale from early morning to midnight, the newsletter asked customers what time they preferred. "They felt involved in that change," he says.

2. Generate excitement.
Kerschbaumer believes his sale works because he offers a juicy deal for a limited time. "The only way people will trust you and be a part of something like this is if the offer is so outrageous that they say, 'Yeah, it makes sense [to take advantage of this],'" he says.

He limits the sale to two hours in person at the store and advertises that only the first 100 people will qualify. But he has always sold to anyone who makes it in the door in those two hours, usually a handful more than 100. Announcing a limited offer creates a sense of urgency.

Related: OpenIndie -- Reeling in Funds from Fans

"If people think it's always available, they won't take it now, and they might never take it," he says. This past year, people started lining up at 7:30 p.m. for the midnight sale.

3. Get the money up front.
Kerschbaumer expects to give away $94,000 in services in the first half of 2011. That's a lot of free stuff. But he's also sold that amount of services at full price and he's gotten money up front for services to be delivered later.

"I'm projecting these services over time," he says. "And since I can schedule people, I can plan accordingly. So I won't overwhelm my staff or be left twisting in the wind by everyone coming at once."

4. Set limits.
Kerschbaumer also puts parameters on how customers redeem their offers. The certificates have an expiration date, so he knows that he'll be giving away services for only six months. He also limits the number of people who can use their gift certificates on any given day so he still has a minimum amount of cash business every day.

This year he stopped letting people break their purchase into multiple certificates. If you spent $400, you would get two certificates for that amount, not, say, a series of $100 certificates. He found that people would give them as gifts and the recipient would come in after they expired and be upset. The change cost Esspa $4,000 to $5,000 in sales, he estimates, but believes it would be worse to have a potential new customer disappointed.

5. Communicate your plans.
Kerschbaumer always tells his customers how the sale money will go toward serving them better. The spa closes for a week in January for major renovations.

"People know to look around afterward at what we did, maybe new recliners or a new treatment room," he says. "That makes it comfortable for them to come in and spend this money."

6. Deliver.
Kerschbaumer wants people to have a great experience when they use their gift certificates, whether they're loyal customers or first-timers. But his staff tended to skimp on the freebies. Now he constantly reminds them to treat these customers as well as they would those who pay on the spot. "It's a lucrative database," he says. "You want them to come back. . . so you have to meet or exceed expectations."

Related: Crowd Funding Sites Leverage Money from the Masses

Eileen P. Gunn is a freelance writer in New York.

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