Small Business Salon: John Krech, Phitch

By Marc Tracy

"It’s been entirely self-funded. I used my 401(k). The lucky thing is I cashed out at the perfect time, before everything dropped! Yeah, it’s a risk, but I’m investing in myself. I believe in an idea. I knew I had something very valuable that nobody else had."

Our guest today is John Krech, the owner of ePhiphony, a one-person business that sells a patent-pending inventory optimization software called Phitch, designed specifically for small business owners. John discusses what makes Phitch unique (it uses a new metric, called "economic profit", to determine ideal inventory), how small business owners should manage their inventory during this recession, and what it's like being a small business owner whose clients are also small business owners.

If you are a small business owner interested in being interviewed for Small Business Salon, or know one who would be (or should be!), please email us at bizboxonslate@gmail.com.

BizBox: Please tell us about your business.
John: Epiphony Inc. was founded in 2007. We specialize in helping small businesses survive. Most businesses have more inventory than they need, because they don’t have the the tools or experience. We try to provide the intelligence to help them make better decisions, so that you only have what you need at any given moment--neither too much nor too little.

Small business owners are struggling not so much from profits but from cash—they don’t have the cashflow. And that’s where our software comes in. We took a formula—most of the big companies are using a formula that was developed in 1913. And we redid it for today’s business.

How did you redo the old formula, and improve upon it?
The old formula took the cost of ordering and of holding inventory. It's a very good model, it’s easy to put into your computer. But we started from scratch. Cost really doesn’t tell me the whole picture. We switched to a metric called economic profit. For a business, that’s operating income after taxes, minus cost of capital. So we’ve got a different metric. But also what we did is, the old model focused just on ordering cost, and we changed to be a little more in line with how business is done today.

So now we’ve got this number-cruncher. How do you order, and when do you order? Because you also don’t want to order too early and tie up your money. The software lets you bring down inventory levels, so that you can use that money for something else.

Our business model is really to provide a powerful tool, but it has to be easy to use, because frequently the person doing it is wearing multiple hats. Like myself: it’s just me, so I have to do everything. Any little thing that frees up my time so that I can focus on my business is a good thing.

How did all this come about? What made you start your own company?
I spent twenty years with a Fortune 500, and I worked with manufacturers all over the world, small and large. I saw this universal issue: how much to order, and for when? What I thought is that oftentimes, maybe because they’re so busy doing other things, people order monthly, or, if they’re a little bit computer-savvy, they start creating their own spreadsheets. But it still depends on what that person’s metric was. Minimize costs? Minimize inventory? My whole thing was, how do I solve this debate? How do I find a better way, that makes everybody happy? Economic profit, our metric, is the better way.

The key is you look at inventory as an investment. You’re investing a large amount of your company’s money. How do you get the best return for that?

Did you design the software?
I designed the software. I’m not a programmer myself. I contracted out rather than hired someone in. Right now, our product is compatible with [Intuit] QuickBooks. But now we want to be compatible with Microsoft Dynamics. What we do is take existing software packages that are out and make ourselves compatible.

Why did you contract out the programming?
By contracting out to a custom software developer, I can get size and experience, more so than if I hired in. And I brought an end-user perspective. It freed me up: instead of getting into the minutiae of code, I could focus on user interface, testing it. Our software was released in December of ’08. And we were certified by Intuit in January.

How do you sell Phitch?
The main thing is, we’ve got a growth plan. Our business model is to drive traffic to our Website, get them to try it—because we offer a free trial. So it’s an inside-sales model. We’re really not focused on door-to-door, so much as making people aware, through our blog, through social media like Twitter, through commenting on other blogs, through networking. But it’s also through our alliances. We’re working with the Small Business Development Centers, [which is] part of the SBA. They have about 1000 offices nationwide, they help 1.2 million small businesses a year. They have a Website, we’re featured, and QuickBooks is the only other solution like ours that’s featured. We’re on Intuit Solution Marketplace now that we’re certified. We want to have additional compatibility and have a broader audience.

How have you secured financing?
So far I’ve funded myself. The main reason is, I wanted it to get to a point where I would be more in a position to get outside funding. So now the patents are pending, the product has been developed--now we’re in a much better position to get funding, whether it’s from an angel investor, or venture capital, whatever. So it’s been entirely self-funded. I used my 401(k). The lucky thing is I cashed out at the perfect time, before everything dropped! Yeah, it’s a risk, but I’m investing in myself. I believe in an idea. I knew I had something very valuable that nobody else had. As long as I stay in a very unique selling position—we’re the only one that does it from a financial perspective, and it's a software that’s very affordable. We’re $144 flat. I knew I had a good business model that would succeed. Now I’m at the stage where by the end of the year, I want a much larger investment.

If Phitch could talk, what would it tell small business owners regarding how they should manage inventory during these tough times?
The software would say, "Yeah, times are down, so obviously now is the time to bring your inventory down. But you gotta be ready to see that uptick and get that demand back. If you’re not watching, you might miss out. Business is dynamic. And you have to be ready for when things start to improve. Many businesses are maybe 3% margin. Now that things are down, how can you free up cash? And inventory is one of those ways. It’s been documented by the SBA: one of the top ways of failing is failure to manage inventory."

Since all your clients are small business owners, has it helped you to be a small business owner yourself?
Oh yeah. You’ve gotta understand their point of view. Being a small businessperson, I can very easily put myself in their spot. It puts you in a whole different perspective.

How do you like being in business for yourself?
It’s so fun. To me, it’s been really rewarding to be able to create the whole package. And I’ve learned so much by having to wear multiple hats. I’ve learned a lot about myself. You have to be pragmatic, know your weaknesses, bring in people. But for me it’s been a great experience. I like the flexibility—to work different hours and things like that. I find myself working a lot more hours, but I don’t notice it. It really reinforces that saying, that if you do something you love, you’re not going to work a day in your life. To me, the days just fly by. It’s kind of the pride in creating something.

To me it’s been fun to involve my kids. My daughter came up with “Phitch”. She’s very musical, and I said the software defines the rhythm of when you buy. And she blurted out, “Pitch”. And to me it was just perfect. When you think about music, that’s really what Phitch is doing for a business. It’s defining the individual inventory item. How do you get in tune so you sound good? That’s what we do.

Check out our previous Small Business Salons.

Comments (0)

May 14, 2009 12:33 PM