Delete for web play. HATTIE: Hi. I'm Hattie Bryant, and this is the place to be if you want to learn how business works from the inside out. Business owners themselves explain how they create products and bring profits to the bottom line.

When you met Charlie Woo here a few years ago, his Los Angeles-based toy manufacturing company was doing $10 million in sales. Since then, he's added products and tripled his size.

CHARLIE WOO: It takes a lot of hard work and perseverance and stubbornness sometimes. If you believe in something, you have to go at it until you get what you want.

HATTIE: Congratulations, Charlie.

We hope you have a computer in the room where you're watching TV. Come online now to SmallBusinessSchool.org to learn more from Charlie and the dozens of small-business owners we have studied here.

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Key Idea #1: Work Long Hard Hours for Years

HATTIE: (voiceover) Bob Orenstein's International Wine Accessories happens to be located physically in north Dallas, but with mail, phone, fax and the Internet, most of Bob's customers don't even know where he is, they just know he has what they want.

BOB ORENSTEIN: This is the top-of-the-line, most aesthetically pleasing, as well as functional, glass made today.

HATTIE: This glass is for Pinot Noir.

BOB: ...and you would only fill it up to about here.

HATTIE: This glass is for Cabernet Sauvignon.

BOB: Notice the difference in the design.

HATTIE: Right. Funny, I didn't know it mattered.

BOB: A bowl such as the Pinot Noir, the wine is more delicate. So you need it to open so you can get the full nuances of it.

HATTIE: (Voiceover) One college course in wine tasting and Bob Orenstein was in love for life. His hobby became his business when he quit his job running the tax department at American Airlines to become an entrepreneur.

BOB: And that's it.

HATTIE: Pops it out.

BOB: I think I was an entrepreneur--you know, born to be an entrepreneur. I was the oldest child. I was the one who was always responsible. You know, when I was younger, I sold Army-Navy clothes, surplus, when it was hot in the '60s. I was always, you know, inventing things. I was always involved with moving forward and doing different things in life. And I never really fit in the corporate culture. I did--I succeeded. I moved up four or five times in American Airlines. I had a good job, good reviews, but, you know, sometimes in your heart, you know you don't belong. I never belonged in the corporate world.

The first thing I'd like you do is I'd like you to just pick up this glass, roll it a little bit, and try to smell the aroma.

OK, now I want you to try the other glass, OK? This is the one that's made for this wine. Remember, a Pinot Noir's very elegant, it's somewhat fragile, it's got a very nice bouquet to it.

HATTIE: It does smell different.

BOB: You may notice it smells more open.

HATTIE: Smells more floral in this glass.

BOB: And it comes up--the bouquet comes up, the floral nature of it.

What started in the spare bedroom of his condominium in 1983 now generates $18 million in sales, employs 20 people, while outsourcing printing, database management and catalog design.

BOB: My dream was the American dream. I was going to start this business, and within several years, I was going to make $1 million.

HATTIE: OK, what happened?

BOB: Well, to my dismay, I found that I had to work. I went from 65 hours a week to 80, to 85 hours a week. I did everything, everything, from packing boxes to typing the invoices. Remember, back in 1983, '84, there's no computers. I mean, we just used typewriters.

I did all the ordering. I answered the phone. As a matter of fact, the phones were in my bedroom, so we had the 800 numbers come in, I'd wake up at 3 in the morning, 4 in the morning. The phone would ring I would pick it up and from a deep sleep and say, `IWA.' It was almost insane.

HATTIE: Your wife's saying, `Wait a minute, I'm trying to sleep.'

BOB: No, my wife was very supportive in those days, extremely supportive.

HATTIE: Well, good. So it was like the phone rings and you're excited because it's an order.

BOB: That's exactly it. I mean, in those days, we were lucky if we did $2,000 a week in sales. Lucky.

Key Idea #2: Convince Your Family To Invest

HATTIE: All right. Your wife was very supportive. Let's talk about that, because when you cut loose from this job, that was an income that went away.

BOB: Right. We had to live off her income and my savings.

And what that meant is for a period of about one year before I left to about one and a half years after I left, I did no clothing shopping, we never went out to eat, we went on no vacations, we did absolutely nothing but work. My wife's free time was go to work, come home, work with me. And we did that seven days a week for several years.

HATTIE: So you started with your savings.

BOB: Basically started with my savings, borrowed money from my father and my brother, and in addition, I sold my coin collection.

HATTIE: The growth points--how long did it take you to get out of the condominium garage?

BOB: It took us, oh, about a year and a half, two years to get out of that, and the reason we got out is our neighbors called the city because we had 40-foot trailers rolling down over their front lawns and they were a little upset. So we were thrown out.

HATTIE: So you were having product delivered to your garage.

BOB: Absolutely. And they come in 40-foot trailers. You took what you could get. And, you know, we had no forklifts in those days. We just had a little dolly that we bought at Sam's for $29.95, and that's how we did it.

Key Idea #3: Sell A Lifestyle Not A Product

HATTIE: The retail business is strictly mail order, but one-third of the sales come from wholesale distribution to wine stores, gift shops, hotels and restaurants.

BOB: Actually, I started out and I wanted to be a wholesaler. I wanted to sell to wine stores different corkscrews and glasses and different accessories. However, when I started this, I left the corporate world, put my three-piece suit on, went to do my little flip-chart presentation for one of the largest chains in the Southwest, and three-quarters of the way through the presentation, they said to me, `Well, this is all fine and dandy, but we gotta be honest with you. Our attitude is, if they don't have a corkscrew, let them buy a screw-top bottle.' I panicked. I said, `Oh, my God, I gave up my job and these guys don't care.' So I came back and I said, `Well, how do I create demand?' And the idea was to come up with a mail-order catalog, send it to the stores and also send it to whatever customer lists I could find. That's how I got into the mail-order business.

Wine cellars come in all sizes, all styles. This one will hold approximately 520 bottles.

HATTIE: Bob, who's got 500 bottles of wine?

BOB: Most people.

HATTIE: Most people. Not me. So is this a hobby?

BOB: It's a hobby and a lifestyle, and that's the difference of this business vs. most businesses. We're not selling a product, we're helping sell a lifestyle, and these are the props that go with that lifestyle.

HATTIE: So it's like when I have company, I want to impress them with my VacuSeal or my fancy glasses or my Screwpull that costs a couple hundred bucks.

BOB: Right. But remember, this is functional, also. That's the difference.

HATTIE: Now, again, the demographics--is this a baby-boomer thing?

BOB: The demographics that we have found through our studies is that, generally, it's a baby-boomer thing. It's for people between 35 and 55. And the people that are spending the money on wine cellars, on expensive glasses tend to be 45 to about 52 is the range.

HATTIE: And you're in the right place, because that's where we all are.

BOB: That's exactly it. That's where we all are.

HATTIE: Now what's this up on top?

BOB: This is one of my favorite things. This is what we call the StemSaver....and this is something that I own, have the patent on it.

HATTIE: Oh, you put them in the dishwasher.

BOB: And you're able to take your glasses and put them in.

HATTIE: So you invented it?

BOB: I invented it. It took me years and years and years to do it, because I just don't have time,

HATTIE: Now who's Mr. Belden?

BOB: Well, Belden is the company that manufactures it.

HATTIE: So you do the deal, you invented it and you went to them and you co-branded the product?

BOB: And we co-branded and they take part of the marketplace, I take part of the marketplace.

HATTIE: Cool. So people are buying them?

BOB: Yeah, we sold about 5,000 of them in less than a year.

HATTIE: That sounds like a lot.

BOB: It is a lot. Thank God we have some successful products. Some are, some aren't.

HATTIE: Well, isn't that the way it is, though?

BOB: That's true. And the ones you invent, you spend 10 times the amount of money inventing them. That's why sometimes it's cheaper to buy a product and not take the risk.

HATTIE: Well, but if it bubbled up out of your head and out of need--that's another thing. Do you think because you and your wife needed it, all your customers needed it?

BOB: Exactly. And that's how a lot of this stuff came about. It's to fulfill a need. We find that froufrou products that don't serve a need don't sell very well. They need to be functional. If they're functional and beautiful, they do better than beautiful or just plain functional.

Key Idea #4: Stay Close to Your Best Customers

HATTIE: International Wine Accessories has a database of 400,000 customers and will mail three million catalogs in a year. The ink-jet on the outside. Is that saving you dollars in the printing process?

BOB: Well, the ink-jet allows us to print only twice a year, and each time we print, we print seven to eight covers simultaneously. And we have a little white box on the front cover, which we're able to change the offer. So each drop, we can change the message. The cost of ink-jetting is nominal. Instead of going out and printing, you know, 200,000 this time and 200,000 this time or half a million, then another half a million, we print twice a year and we get the economies of scale, which basically lower our costs dramatically.

HATTIE: How do you get people to keep buying from you?

BOB: Well, it's real difficult, but the general rule of mail order is real simple: You cannot mail your best customers too often. So what you do is that you continually mail to whoever you designate as your best offers. How do you designate them? That's database marketing. This is where the computers come in. This is where the data is extracted, interpreted, manipulated, and then we get an output, and from that output is what we mail.

HATTIE: OK. Talk to me about that. Is that another outsourcing situation?

BOB: That's an outsourcing situation. Basically, although we're a PC-oriented company here and we use a file server with Netware to run the business, in the real world, everything's run on IBM mainframes. That's what happens in the real world. So what we do is we have a parallel database; we have one here and one there. You know, I'm in the marketing business. I have to do marketing. But I found that marketing was a lot easier to learn than accounting, and that accounting and finance gave you the disciplines of knowing how to analyze. Well, what marketing really is, is we all think of it as coming up with creative ideas. Well, creative ideas are not that difficult to come up with. The real idea is, how do you measure whether that creative idea works or doesn't work? Well, you have to have a financial background to analyze it. So direct marketing, which really boils down to statistical analysis, is exactly what I fell into. So it was a natural for me.

Key Idea #5: Use Numbers To Make Decisions

HATTIE: So do you have some quick ratios, some measurements that you're looking at on a daily, weekly, monthly basis, Bob?

BOB: Yes. Being an accountant, I look at all the traditional ratios, although we don't worry 'cause we have no debt, so we don't look at those things, and we have plenty of cash. So we do look at ratios, but the ratios we look at are basically gross margins. We look at the percentage of gross dollars that falls to the bottom line. We'd like to keep it well above 10 percent and, of course, we struggle to try to push it to 20 percent. Most businesses are lucky if they can get 4 percent or 5 percent or 6 percent or 7 percent. We try to keep it a lot higher, if at all possible. But really on a daily basis, we look at something called margin per thousand, which is unique to the mail-order business. And basically what that says is on a daily basis, we look at our response rates--how many people respond to our catalog in percentages, which generally run between 1 percent to 2 percent, closer to 1 percent, and then we look at margin per thousand. And margin per thousand is defined as the profit generated on a thousand pieces of a mailing, how much money do you make? And we try to keep it in the range of $500 to $1,000 per thousand, which really equates down to 50 cents to $1 profit per catalog mail. That's what we try to do. Traditional mail orders are lucky if they can do 20 cents or 30 cents.

HATTIE: So you're way above.

BOB: We're way above. And the reason we're way above is 'cause our average order is well over $200, our margins are--our wine cellars are very tight, but on smaller items, are reasonably high, so that we're able toproduce those margins.

I mean, what it all boils down to, a lot of people don't realize this, but mail order, when you really get down to it--I mean, you go in and you interview a CEO who's, you know, a former salesman or an engineer and all that, they have no idea what they're doing, because what is mail order? Mail order is statistical analysis and review of numbers. It's all numbers, all, all, all. Sure, you need the customer service, you need to buy the products right, you need the accounting, but it's statistical analysis, because what you're doing is you're going out and you're rolling that dice each time you do a mailing and you're mailing out 200,000 catalogs. There are 300,000 catalogs in a mailing, and your response rates are only 1 percent and 2 percent. If your response rates fall, you could really lose a lot of money.

HATTIE: Bob says you can't just increase sales to improve your business, you have to pay attention to the cost of doing business. His favorite ratio is gross sales per 1,000 pieces of mail dropped. By paying attention to this number, he has increased IWA's return on investment, and it is two to three times better than other direct-mail companies. Paying attention to small details can bring big results.

Key Idea #6: Find New Products to Increase Sales

Pappas Steakhouse in Dallas is part of the Houston-based Pappas Brothers restaurant operation and is one of Bob's wholesale customers. It offers its guests up to 1,500 wine choices to accompany the finest steaks in the world.

HATTIE: Steve Stumpf, who runs IWA's new food division, and I taste Kobe beef and Cabernet Sauvignon.

Steve, why are you all selling Kobe beef?

STEVE STUMPF: Because it's the best beef available. Let's taste it and see.

HATTIE: Well--mm, melts in your mouth. All right. So this is the new thing. This is the front edge.

STEVE: Yes, it is. You know, people are looking for the ultimate in beef, and I think this is it.

BOB: We have wild boar ribs, we have special smoked salmon that's brought in from a very, very small place in Maine, and we have fresh lamb from Australia. They're all the best and all fresh, not frozen.

HATTIE: The 10-person sales team takes as many as 1,200 calls on a peak day. They also make outbound calls on customers.

DAVID RUSSELL: I'll beat any price. I'm not concerned with that. I just want to keep one of my better customers happy.

BOB: This is David Russell, our sales manager and our ACD traffic control manager.

HATTIE: Now what does ACD stand for?

BOB: Automatic call director. It takes all the calls that come in the building and distributes them evenly between all of the representatives. They all have an equal chance at making a commission on a sale.

DAVID RUSSELL: In the past, without a system like this, you didn't really know how many customers were on hold, how long they were holding, where they needed to go, who they needed to talk to. And now this enables us to be able to manage that.

TOFIQ YUSEF: What do I have to do to earn your business today?

HATTIE: Tofiq Yusef is manager of major accounts.

TOFIQ: Every salesperson should have that phrase What do I have to do to earn your business?'

HATTIE: And not be afraid to ask?

TOFIQ: And not be afraid to ask. And you have to ask more than once, twice, three times, four times, five times.

HATTIE: Oh, so you have to bounce back and you have to not get discouraged.

TOFIQ: And if someone hang up on me, say, `I'm not interested,' I do call them back.

HATTIE: So you don't get discouraged?

TOFIQ: It never bothers me. I'll call back and ask, `Why did you hang up on me?'

Key Idea #7: Keep Lowering Your Costs

HATTIE: There are times when you have expectations and--or that you get surprised?

BOB: Yeah. I mean, you know, when UPS went on strike, I mean, it was--or could've been extremely devastating, 'cause 90 percent of our boxes went out UPS. So we had to find an alternative, and the alternative--the only alternative--not the obvious alternative, the only alternative was the post office.

HATTIE: Did it work?

BOB: Did it work? It was a miracle. Delivery times were good, their damage rate was less and the cost of shipping was less, and they gave you free boxes.

HATTIE: The thing is what we all need to do with any supplier, and this is--I mean, you're the guy with the sharp pencil, you're the CPA--we all need to be checking our suppliers all the time, right?

BOB: That's true. Just by asking your vendors to re-bid, you'll find the prices will go down.

HATTIE: Ah. So in '83, you started this business but you said to me out when we were walking around that it really wasn't until 1996--that's 13 years until you really felt like you could pay yourself fairly?

BOB: Well, basically, what happened was that in year one, we did $100,000 in sales and lost $140,000. It took till 1988 where I could take out a $30,000 salary and the company still could make about $20,000. By '89, we had a real business. We were making over $100,000 a year, taking out a salary. It was great. By 1990, the recession hit and we lost $180,000 again in 1990. From '91 through '93, we kind of built back the base. '94, we stared cross-marketing with the Wine Spectator and various other publications. In 1994, the business boomed, we grew 68 percent.

However, the tax man took it all because we had to put more money into inventory, equipment and the payroll.

So by the time I was done in 1994, I basically had the best year ever, made hundreds of thousands of dollars, I had to go to the bank and borrow money, you know, basically on my credit cards to pay my income taxes because I didn't have any money; it was all in the business.

It took till 1996, where the revenues from the business didn't have to all go back in and I can take money out for myself. So it took till 1996 till I had more than $10,000 of my own money in the bank that was not set aside for mortgage or this or tha--I mean, I actually had some money.

....John, can you move this paragraph to the ****BOB: I think that business people are optimists, that we trudge on, regardless. You know, it's almost like going through a blizzard. You're probably going to freeze to death; you're probably going to die before you get over to the other side; but why give up? Maybe it wasn't about being so optimistic, as that this was the only path to take. I was just going forward 'cause there was no turning back. And it worked. And I think that you get all the way to the point where you really start making money, and then it's time to re-evaluate again.

HATTIE: So what is it that you think you've learned in your 16 years of running a business?

BOB: Well, I think what it boils down to, unfortunately, is that after all these years, I seem to have more questions than answers. Ten years ago, I thought I had all the answers. Now I've got more questions than answers. And to be honest, I'm starting to get to the point where I'm not even sure what the questions are anymore.

HATTIE: What is it that you really want these 400,000 people on your mailing list to have? What is it that you want to give them with Kobe beef and this smoked salmon? What do you...

BOB: I want to give them a life experience. I want to give them a lifestyle. I want to give them what I'm looking for, something new, different, exciting, something unusual, something they would not have found if I didn't put it in front of them.

HATTIE: And that's what a business is all about, creating and maintaining customers.

BOB: Right. Absolutely. *****End. (John, if you can drop the the paragraph in green down to here for a strong close that might be good. Please let me know if you do this so I can fix this transcript.)

Delete for web play. To add your name to the catalog list, call 1 (800) 527-4072.

HATTIE: Bob has been a member of the Direct Marketing Association for years. By joining the organization, made up of your peers, you shorten your learning curve. The DMA is a large organization with special interest groups. You may be like Bob and own a catalog business, but even if you simply use direct mail in your marketing mix, you can learn from the members of the DMA.

Why did you join it in the first place?

BOB: Well, I think in the beginning, the way they have the dues structured, it's very inexpensive when you're very small. And I felt that--coming from a CPA-type background and being, you know, in the corporate world, I felt that I needed to align myself with a professional organization to get help, to get advice and to get some support. And that was the best organization available.

Delete for web play. HATTIE: For much more, go to the Internet, the-dma.org.

PS. Key Idea #8: Find Money to Grow

HATTIE: Your product, processes and people are all inspired by your mission and fueled by money. Most of us never have enough money from retained earnings to take a growth leap. Fortunately, there's a new financial instrument available to all of us for raising money. David Pinkus of The Small Business United of Texas believes in the Small Corporate Offering Registration (SCOR).

DAVID PINKUS: SCOR, or the Small Corporate Offering Registration, is an SEC public offering exemption whereby a small company can raise up to $1 million in 12 months and it can be also sold in more than one state if you register the offering in those states. The intent of the Securities Exchange Commission was to find ways that small businesses could inexpensively go out and raise equity capital from the public by selling stock without having to spend $150,000 in legal fees and hire a whole slew of attorneys to do the offering. Typically, a small corporate offering registration can cost anywhere from $10,000 to $40,000 or $50,000 in legal and attorney fees to get it done, as far as getting it registered. But the selling of the stock is still the hard thing, is finding somebody that will write you a check for $1,000, $2,000 or $50,000 to buy stock in your company.

We also have a SCOR kit that includes the use of and a number of articles written by attorneys, CPAs and so on, about what you need to do in order to do a SCOR offering and some ideas. It also even has an example of a disclosure document.

HATTIE: So the encouraging word is, if we're willing to do the due diligence, if we're willing to fill out the forms, go through the rigerous process, you believe there's money at the end of the road if our idea is good?

DAVID PINKUS: And you're willing to give up equity in your company.

I mean, it's a very important thing that people need to understand, is when you go out and take in and raise equity capital, you are giving up a percentage of the ownership in your company. But if you're willing to do that and you can show a legitimate strong return on their investment, you can raise some money.

Delete for web play. HATTIE: Have you calculated a current ratio recently, as Bob does? Come to SmallBusinessSchool.org and click on `Money' to learn more about business ratios, three-dimensional business modeling and small corporate offering registration. You can register for free information or request e-mail updates from us.

Bob's early training made him pay attention to numbers. He says running a sustainable business means you have to have a head for the numbers or hire someone who does. We'll see you next time.