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.
Behaviour of Fixed Cost Total Fixed Cost Fixed Cost Per Unit Rs Rs Units Units
Behaviour of Variable Cost Variable Cost Per Unit Total Variable Cost Rs Rs Units Units
Cost Volume Profit Analysis Cost 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 $100 $200 $300
Cost Volume Profit Relationship
Break-Even Analysis Contribution 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 price VC = Variable cost per unit N = Sales in units N = FC/(SP – VC) FC = Total fixed costs
Entrepreneurs Earn Profits 1. To pay themselves 2. To expand their businesses 3. 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 EOU 2. Hire others to create the units 3. Increase volume of units being sold 4. 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
ENT 208/602 Technology Venture Creation Final Presentation
… You have about 8 min of talking time and 5 min of Q & A You will not be able to cover everything You should plan to share the “m ost im portant” learning in the process and tie it to your Business Model. W e w ant to prim arily hear about the custom er problem / need 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 ALSO You 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 Framework WHY: CUSTOMER MOTIVATION A well defined market need WHAT: SOLUTION WHO: TEAM A viable product or The core execution service that expertise (both coherently internal and addresses the need advisors) WHEN: TRENDS WHERE: MARKET Why is this the right An interesting time to address existing or new this? emerging market HOW: BUSINESS MODEL How your solution reaches the customer and you make money
What can you do How does your Who is your for a customer? customer acquire customer? your product? A product Purpose Competition or service around Problem Product which you can build a Solution Business Model profitable company Why Now Team and a net Market Size Financials positive return to investors How do make money off your How do you design product? and build your product? How do you scale your business?
Persuasive Outline for the Product/Service Begin with an attention-getter A related to the customer’s needs Introduce the product, service, or idea and create interest by stating I specific customer benefits Create desire to respond positively D by presenting convincing evidence of the value to be gained Encourage action by making it easy A and restating the main benefit
Your Theme “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.
Required Evidence How have you validated all the Customer information? How have you validated the Value Propositions? What Customer Discovery evidence backs it up? You must clearly indicate whether your statements are still untested hypotheses (guesses) or backed up evidence from your interviews
Value Proposition What customer problems are you helping to solve ? What customer needs are you satisfying? Product Features = Value Propositions
Give Actual Information. Interview Breakdown End Users = ? Decision Makers = ? Others w ith a role in purchase = ? Others w ith 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
Top three things you learned Insight #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 – NOT your technology/product/service.
Current Business Thesis Who 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 Plan Explain 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 #1 Define the Building A New Business company/business in Opportunity a single declarative Vision sentence Highlight what you Access to Distinctive Capabilities of Resources Competencies the Team are creating Bring out the value Innovation Business Industry and benefits or Strategy Context Novelty emerging out of the venture Talent Structure Processes Profitability
Problem #2 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
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