Building a Business – Part 2

In my previous post, part one of building a business, we examined a restaurateur  who had visualized a new approach  to home delivery. In that example there was scant mention of building  a model for profitability prior to implementing that vision. Such an approach was not problematic in the example since we were dealing with  an existing business where low risk experiments  such as the one described can in fact be used as the basis for building  a profitability model. The same can be true of entirely new businesses, provided that the level of investment to perform the first experiment is manageable.  In fact, it is generally preferable to test a vision under real-life circumstances  in order to ensure that the idea  not only resonates but that people are willing  to pay an adequate amount for the product or service. Let’s use  an example  of an individual  who decides to start an online store for selling sunglasses.  This individual  has a vision for selling  a product that not only blocks harmful  UVA and UVB rays, but  also believes eye wear should block more light from the top and sides of the frames and designs a product accordingly.  Given the ease  of offering such products for sale  on the Internet, this individual launches an informative website and a supporting store on Amazon  along with a blog explaining  the virtues of their product. The cost for all of  these components  is very modest, totaling  only several hundred dollars ($300 for our example). The larger investment is in the individual’s time  as well as in an initial production run  of the envisioned sunglasses.  Let’s say the initial production run for  1,000 pairs of glasses costs $5,000 – $5.00 per pair.  If the fledgling business owner subsequently  spends $4,000 promoting and eventually selling all 1000 units  then  the profit is  $700 excluding  the value of the individuals time. This is a great start, as the initial experiment  has demonstrated demand for the product, a willingness of  buyers to pay  a certain price, and a level of profitability.  At this point it is possible to build a model reflecting the experienced costs and revenue expected as selling efforts  continued.  It may also be beneficial for the seller  to  experiment with  different price points to determine if profit margin is being left  on the table.

Up next:  Scaling up.

 

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