When customers shape your business

28 July 2017

As a further teaser for the STEM User Group Meeting in September 2017, we are going to sketch out the shape of a small business, and consider three growth modes for that business. In September we will work through these concepts as an interactive exercise over two days to illustrate how you can use our STEM software to measure and then forecast scale for your business activities.

What I think we can achieve

Michaela is passionate about quality fresh bread with an individual touch and has been encouraged by her friends and YouTube fans to set up a Best Bread Direct service to deliver her creations right to the door on a regular basis.

Her initial vision is entirely focused around what she can achieve, and she knows she needs to cost it out to see if it looks like a viable business. The main cost elements look like this:

  • large multi-shelf oven
  • slicing machine
  • ingredients
  • power
  • (her space)
  • (her car – but see below)
  • fuel
  • her time.

That’s the easy part, but what about the customers? This is usually the more tentative aspect of a putative business idea! She wants to be scientific about this and breaks down her estimate into several customer types (with likely buying patterns), as well as several product types:

  • student / single adult / couple / small family / large family
  • white / wholemeal / granary / premium special recipe
  • small loaf / large loaf / rolls.

Note: she did wonder about the green option of delivery by bike, but quickly realised this would be too limiting in reach and too demanding of her time.

For each customer type she forecast their weekly requirements and set her prices 25% higher than the local supermarket. Here are the results, and of course she dived in!

Figure 1: Indicative business-model structure and results

What I know we can achieve (and still have a life)

In order to cost her consumables, it was obvious that there would have to be basic quantity drivers to calculate the monthly spend of flour, fat, seeds and so on. Ensuring profitability on direct costs is a business essential; but what about the indirect costs and overheads? Are you sweating your assets (enough) or actually over-running them completely? By adding a credible set of drivers for every aspect of your business, you can make a more realistic forecast for what can be achieved with a certain asset base.

Consider Michaela’s time. She may have imagined that she was super-human, or didn’t mind long hours since she’d be up before dawn for the breakfast run anyway. How much time is really involved? Also, how much bread can get through that first oven, and how many bagged loaves before that economy slicer falls to pieces?

By considering these factors and relating them to the effective, constraining capacity of your resources, you can come up with some measure of utilisation for the business. If you see your business in terms of what your established base can do, then at some level this limits how many customers you can serve and the associated sales potential.

Figure 2: Tentative drivers are better than no drivers if you want to estimate asset utilisation

What do my customers want?

The business first came about, not just because Michaela loved bread, but because she believed there was significant demand for a quality product. Rather than slam on the brakes when she worked out the previous numbers (after midnight again!), she saw what she must do: her business model was telling her that her current load was already way past 100%, and the trend was up. With a bigger team and more resources she could expand her market, increase sales, and reasonably expect to find some efficiencies and economies of scale. By plugging in some different scenarios for likely take-up and expansion costs (such as a van and an industrial unit) she could forecast a best case and worst case with sufficient detail, rigour and flexibility to convince her savvy crowd-funders to invest in her growing dream.

Figure 3: Impress your would-be investors with a robust and scenario-driven business case

Of course, by now she has developed a bit of a passion for business-modelling too and is encouraging her friends to think big about their own aspirations!

© Implied Logic Limited