Economics of One Unit[EOU]

Economics of One Unit Method used to determine whether a business

model can be successful (profitable), by calculating if an individual unit of the good or

service would be profitable. For example, if you are considering producing

Headphones, you need to calculate the cost of making one individual headphone,

and compare it to the price he would charge for the

headphone. If the profit is positive, the business is thought to be

profitable.

Variable Costs and Fixed Costs All the costs faced by companies can be broken into

two main categories: fixed costs and variable costs. Fixed costs are costs that are independent of output.

These remain constant throughout the relevant range and are usually considered sunk for the relevant range (not relevant to output decisions). Fixed costs often include rent, buildings, machinery, etc.

Variable costs are costs that vary with output. Generally variable costs increase at a constant rate relative to labor and capital. Variable costs may include wages, utilities, materials used in production, etc.

Total Fixed Cost Fixed Cost Per Unit

Behaviour of Fixed Cost

Units Units

RsRs

Total Variable CostVariable Cost Per Unit

Behaviour of Variable Cost

Units Units

RsRs

Cost Volume Profit AnalysisCost Volume Profit Analysis (CVP) focuses on the following factors The prices of products or services The volume of products or services

produced and sold The per-unit variable costs The total fixed costs The mix of products or services produced

Schedule of Units Sold, Costs and Revenues

$200

$300

$100

Cost Volume Profit Relationship

Break-Even AnalysisContribution Margin Approach The difference between the selling price and the

variable cost per unit. It is the amount per unit that is contributed to

covering all other costs. 0 = (SP –VC)N – FC or FC = (SP – VC)N where:

SP = Unit selling priceVC = Variable cost per unitN = Sales in unitsFC = Total fixed costs

N = FC/(SP – VC)

Entrepreneurs Earn Profits

1. To pay themselves2. To expand their businesses3. To start or invest in other businesses

Gross profit = Price – Cost of Goods Sold

Define Your Unit of Sale Manufacturing—one order (e.g., 100 watches) Wholesale—a dozen (e.g., 12 watches) Retail—one item (e.g., 1 watch) Service—one hour of time (one hour mowing) or

one completed task (one lawn mowed) Combination—average sale per customer

Average sale per customer – average cost of sale per customer

Average gross profit per customer

Unit of Sale as a Combination of Different Items

Cost of Goods Sold (COGS)

COGS = cost of labor and materials required to make one additional unit

COSS (cost of services sold) = cost of labor and materials required to provide one additional unit of service

Economics of One Unit (EOU) Method for seeing if a business can be

profitable

If one unit of sale is profitable, the whole business is likely to be profitable.

Selling price per unit – COGS per unit = Gross profit per unit

Economics of One Unit (EOU) —Manufacturing

Economics of One Unit (EOU) —Wholesale

Economics of One Unit (EOU) —Retail Business

Economics of One Unit (EOU) —Service Business

Economics of One Unit (EOU) —Example

The Entrepreneur’s Strategy

1. Start a business with a profitable EOU2. Hire others to create the units3. Increase volume of units being sold4. This frees the entrepreneur to start new

businesses

Result: The entrepreneur creates jobs and wealth.

Unit Economics: Basis for Financial Operating Plan by Calculating the Profitability of a Single Sale

What does a typical transaction with a customer look like? What is the product/service? Who buys and who sells? How does the transaction take place?

What is the price? What does it cost to acquire a customer? How does that value

change over time? Marketing costs Sales costs Lead generation costs

What are the costs involved in delivering that product/service? Bill of Materials (BOM) Cost of manufacturing (e.g., for contract manufacturing)

Unit Economics: Basis for Financial Operating Plan by Calculating the Profitability of a Single Sale

Other items in Cost of Goods Sold (COGS) Logistics/Distribution Installation / Integration Customer Service / Reverse Logistics

What is the profitability of that initial sale? Show a calculation of profitability of that sale, and cite the

assumptions used. How does that profitability change over time?

What other operating costs exist in your business? How will you project these costs?

Product Development costs Facilities costs Other support functions (Overhead) costs

Thank You

Final Presentation

ENT 208/602 Technology Venture

Creation

…

You will not be able to cover everythingYou should plan to share the “most important” learning

in the process and tie it to your Business Model.

We want to primarily hear about the customer problem/need

You have about 8 min of talking time and 5 min of Q & A

Specifically we want to hear what you learned from the customers– what you heard, NOT just what you think.

This is a LESSONS LEARNED presentation.

You should be able to tell your story without slides

ALSOYou should be able to tell your story without

describing your technology

Yes, you read that correctly! Focus on why you are doing something for a customer – what is the value?

Opportunity Assessment FrameworkWHY: CUSTOMER

MOTIVATION

A well defined market need

HOW: BUSINESS MODEL

How your solution reaches the customer and you make money

WHAT: SOLUTION

A viable product or service that coherently

addresses the need

WHERE: MARKET

An interesting existing or new

emerging market

WHEN: TRENDS

Why is this the right time to address

this?

WHO: TEAM

The core execution expertise (both

internal and advisors)

Purpose Problem Solution Why Now Market Size

Competition Product Business Model Team Financials

A product or service

around which you can build a profitable company and a net positive return to investors

Who is your customer?

What can you do for a customer?

How does your customer acquire

your product?

How do you scale your business?

How do you design and build your

product?

How do make money off your

product?

Persuasive Outline for the Product/Service

Begin with an attention-getter related to the customer’s needs

Introduce the product, service, or idea and create interest by stating specific customer benefits

Create desire to respond positively by presenting convincing evidence of the value to be gained

Encourage action by making it easy and restating the main benefit

A

D

I

A

“What we thought, what we did, what we learned, and what we plan to do

next…”

This is the “narrative arc” of your presentation. We are ONLY interested in

what you did DURING the course and learned THROUGH the interview process.

Your Theme

How have you validated all the Customer information?

Required Evidence

You must clearly indicate whether your statements are still untested hypotheses (guesses) or backed up

evidence from your interviews

How have you validated the Value Propositions?

What Customer Discovery evidence backs it up?

What customer problems are you helping to solve ?

What customer needs are you satisfying?

Product Features =

Value Propositions

Value Proposition

Interview Breakdown

End Users = ?Decision Makers = ?

Others with a role in purchase = ?Others with NO role in purchase = ?

Indicate who you spoke to...whether your customers are other organizations/businesses…and how many interviewees were partners, experts, regulators, etc, outside of buying decision

Give Actual Information.

Top three things you learnedInsight #1?Insight #2?Insight #3?

These can be on separate slides, but all MUST be insights about your Customer or

other aspects of your business model – NOTyour technology/product/service.

Current Business ThesisWho is the primary customer? (Who will use

your product? Who will decide to buy?)

What is your product? (High level – avoid technical jargon.)

Why would the customer use it? (What value does it offer over existing solutions.)

Continued Discovery PlanExplain your plan for continued business model

discovery and validation. What will you do beyond this course?

Do you intend to proceed further? How will you incorporate your findings from the

course into that?

Company Purpose Define the

company/business in a single declarative sentence Highlight what you

are creating Bring out the value

and benefits emerging out of the venture

Building A New Business

Opportunity

Vision

Access to Distinctive Capabilities of Resources Competencies the Team Innovation Business Industry or Strategy Context Novelty Talent Structure Processes Profitability

#1

Problem Describe the pain of the customer (or the

customer’s customer) Outline how the customer addresses the

issue today List out specific areas which need to be

addressed

#2

Solution Demonstrate your company’s value proposition

to make the customer’s life better Show where your product physically sits Provide use cases

For (target customer)

who (statement of need or opportunity)

that (statement of benefit)

Differentiation

Unlike (primary competitive alternative)

our product (statement of primary differentiation

What are you developing?

For Whom? What Value are you

bringing? Benefit in practical

terms: In use In cost

Positioning Statement

#3

Problem-Solution Fit

Team Founders & Management : specialization, role and

commitment Board of Directors/Board of Advisors Please indicate who are helping you and why? Indicate how the team will be expanded over the next

two years in terms of: Development, production and marketing needs ; and Expertise and experience needed

#4

Why Now Set-up the historical evolution of your

product/service category Define recent trends that make your solution

possible The Elements of the Business Story

BackgroundDescribe the current situation, the characters, and the problem.

ChallengeDescribe the challenges and conflicts that impede a coherent plan to solve the problem.

ResolutionPortray a solution to the challenges and the problem and how the venture will succeed by resolving the problem.

Set your development in the form of a real-life story

#5

Market Size Identify/profile the customer you cater to Calculate the TAM, SAM ,and TM

Clearly mention the logic & basis

Reasonable estimate for years 1 & 2 followed by 5 yrs

TAM

SAM

TM

How big is the universe?How many

can I reach?

Most likely buyers?

Market size potential: Rs 25 crore-Rs 100 croreVenture growth rate: 20% to 40%Market share: 10% to 25%Entry barrier: Timing and size

TAM Total Available MarketCombined revenues of all companies that can theorticallyserve a market

SAM Served Available MarketThe subset of the market that your sales team can address or that the product provides specific value

TM Target Market – Beach-headThe initial focused customer base that your product will reach

#6

Competition List competitors List competitive advantages Bring out clearly advantages of your offering

in terms of: Functionality Features Range Price

What could be the most difficult hurdles?How you will try to overcome them?

#7

Product Product line-up (form factor, functionality,

features, intellectual property) Roadmap: Definition & architecture Development & operations plan

Highlight specific values being offered to the customer Five values offered to a customer

1. Product: Performance, quality, features, brand, selection, search, easy to use, safe2. Price: Fair, visible, consistent, and reasonable3. Access: Convenient, location, nearby, at-hand, easy to find, in a reasonable time4. Service: Ordering, delivery, return, check-out5. Experience: Emotional, respect, ambiance, fun, intimacy, relationships, community

#8

Product-Market Fit

Product Description Looks like – Appearance, dimensions, size etc. Feels like – Material, texture, weight,

portability etc. Works like – How will it work? What will be

the output? How is this different from existing solutions? What unique advantages does it offer?

Show actual product: Proof of Concept/Prototype/Simulation

Business Model Revenue model Pricing Unit economics Average account size and/or lifetime value Sales & distribution model Customer/pipeline list Key assets Customer Value Proposition

Technology and Operations Management

Go-To-Market Strategy

Profit Formula

#9

Final Business Model CanvasBased on actual customer feedback.

Financials

P&L Balance sheet Cash flow Cap table The deal Present summary of these statements here. Keep the detailed spreadsheets available for further discussions.

Keep the inputs made to the financial model ready.

Revenue streamsCost structureFinancing/Funding

#10

Financials SummaryYear 1 Year 2 Year 3 Year 4 Year 5

Revenue

Cost of Goods Sold

Gross Profit

Operating Expenses

Operating Income

Interest

Net Income Before TaxesTaxes

Net Income

#11

Raising Money; Making and Selling Year 1 & Year 2 Estimates of costs and revenues Based on TAM, SAM, TM Range of investments needed at each stage based

on development timeline For e.g. : INR 1-10 L – Bootstrap INR 10-100 L – Angel, Early VCs INR 100-1000 L – VCs

Who do you see as prospective investors? Approach these based on their philosophy and

funding size

#12

Just Do It. NOW!