I was lucky enough to be a judge on the UNSW Demo Day held at iCentral last week. Excellent pitches; better than last year which were better than the year before. Given that each intake start at roughly the same knowledge base the annual increase in the quality of the presentations demonstrates the quality of the course leader: Martin Bliemel. Enough... back to the subject of this post about Crumple Map: the winner of the Lean Commercialisation workshop.
First, what is the innovation? Simple. Maps printed on microfiber. Rain no longer a problem (it is for a mobile). I can stuff it in my pocket (dangerous when cycling). And if it still seems clean enough, I can clean my glasses with it too. There are lots of potential uses for the concept: UNSW is discussing ordering some maps for new students; tourist maps; walker’s & cyclist maps; etc. Which market should the team look at? Lots of ideas, lots of potential…
Perhaps this a bit cart before the horse?
What do I mean? Firstly, how many maps we have to sell to pay the costs of the people to run the company? Secondly, is it possible to sell this many?
This is where Lean Commercialisation’s Break Even analysis can be used. This analysis is designed to do a quick check to see if everything makes sense. If there is an order of magnitude of benefit then it’s time to refine the model by adding things such as Tax, Product Returns/Warranties, Insurance, Office costs, Transaction Costs, Cash Flow, etc. into account; and continue the rest of the Lean Commercialisation process. Back to our example:
Costs are relatively easy to establish – cost of production of a batch (say 500, including delivery direct to client) and loaded salary costs (take a standard annual wage and add 10%). How much can the maps be sold for? Review the market place to look at other map products and choose a price for ours. Assume 50% is lost to the route to market channel costs and now we can work out the gross profit per batch. How many batches do we need to sell to pay for two salaries? Could two people manage this number of customers (thinking about repeat orders and referrals)? Or would more be needed? If it feels as if the company is about the right size how many orders do we need to break even.
To illustrate the point, I’ll go through the above paragraph with some numbers (all fictitious except the salary information):
Let’s assume a batch of 500 (delivered direct to client) costs $1,000.
According to PayScale.Com, the average CEO salary is $175K – that is $192K loaded at 10%. And the salary of an administrator comes in at $46K – that’s $50K loaded.
Our preliminary market research suggests that maps will sell at $10 each.
So one batch of 500 maps will net a gross profit of ($10 * 50% * 500) - $1000 = $1,500.
Personnel cost is CEO & 1 Administrator ($192K + $50K) = $242,000 pa.
To cover their cost we will need to sell $242,000/$1,500 = 161 batches per annum.
Assuming 10% repeat orders that means 161*90% = 145 new customers per annum.
There are 220 working days per year (after holidays, etc.) so that equates to 220 * 2 / 145 = 3 working days.
In other words, for the company to break even (with these assumptions – any of which you could easily argue up or down) the team of two would need to be able to identify, cold call, convert, manage an order for and deliver a batch of 500 maps in 3 days (24 working hours).
I mentioned the order of magnitude leeway earlier. What did mean by this?
24 hour / 10 becomes 2.4 hours (an order of magnitude reduction)
So if you are confident that a customer can be found and serviced with an average time of 2.4 hours then the “Break Even Analysis” test has been passed. If not, check the figures or look at plan B!
Simply passing Lean Commercialisation’s Break Even Analysis is not all that is required. There are many more tests to work through but this is a very simple first analysis of how close the business proposition is to being successful.
Would you like me to do the same for your proposition? Drop me a line and I’ll see what we can do.