Business Posts

Best Practices for Startup Break-even Analysis

Early in the startup process, it is important for founders to consider the financial needs of the potential business and complete a break-even analysis. After determining a customer problem that will be solved by a new business enterprise and determining how to create and deliver that solution through a new product or a new service, a founder should make sure delivery of that solution will not only cover operating costs but also deliver a profit. If break-even and a profit cannot be achieved, then the enterprise, product or service should not be pursued.

This blog post will describe best practices to make that analysis as real and as useful as possible. Here we will consider the information that might be included in such an analysis to assure a thorough review that will support good decision making.

First, choose a period for this analysis. We suggest making a monthly forecast. Operating costs and sales revenues are sometimes easier to forecast on a monthly basis. Remember to account for any seasonal adjustments in expenses or sales if applicable to your product or service, as this might make a big difference on an annual basis. This can be done by using the average of what is expected monthly.

Second, identify and list expenses that will be incurred to create and deliver the proposed solution (product or service). This listing might include expenses related to producing, packaging, marketing, selling, transporting, and shipping a product or service. The salary or wages of management and employees can also be included. For startup founders who are dependent on income from the business to cover living expenses, we recommend that the founder’s living expenses also be added into this analysis, as shown in Fig. 1. Your list might be more comprehensive and detailed than this one.

Fig. 1 Monthly Operating and Living Expenses
Monthly Operating and Living Expenses

Next, establish a unit price based on the unique value proposition of the business. The best price is the highest price that a customer will pay. As described in our previous post on how the UVP influences price, the value of a product/service will be determined by that product/service’s quality, how well it solves the customer problem and how it compares in the marketplace. The more relevant, valuable, and unique a product/service is, the higher the price the market will bear. Other factors influencing price are market conditions and competitor products or services.

After collecting these underlying numbers – expenses and price – it is time to put them together in a break-even analysis. Calculate gross margin per unit by subtracting total costs of producing and selling a unit of product or service from the selling price per unit (see Fig. 2). As Fig. 2 shows, small changes in the selling price or unit cost of your product or service can have a big impact on the number of sales required to reach your target gross margin.

Fig. 2 Income Statement to Gross Margin
Income Statement to Gross Margin

Lastly, consider any price adjustments or sales offsets such as discounts, credit card or delivery charges per unit. Figure 3 illustrates the impact of accepting credit card payments and covering delivery (or shipping) costs on the number of sales required to achieve total gross margin.

Fig. 3 Sales Offsets
Sales OffsetsFig. 4 Monthly Break-Even Analysis Monthly Break-Even Analysis

Many thanks to John Galati, NaperLaunch Coach and SCORE Volunteer, for preparing the spreadsheets used in this post. For more in-depth discussion on this and related topics, consider registering for the NaperLaunch Academy workshops. NaperLaunch coaches and SCORE mentors are also available to provide one-on-one virtual assistance.

Posted: 
Monday, February 8, 2021 - 08:30

Unique Value Proposition, Part 2: Use Your UVP to Create a Value-Based Pricing Strategy

As we have written in previous posts, a business’ unique value proposition (UVP) should clearly state why customers will want to buy from that business. It must identify the value promise being made for a service or product. That means that a strong UVP is relevant to a target customer group’s specific problem, promises certain benefits of quantifiable value, and states how a service or product is different from other offerings in the marketplace.

There are several common types of pricing strategies. Cost-plus pricing is simply calculating your costs and adding a mark-up. Competitive pricing is setting a price based on what the competition charges. Price skimming is setting a high price and lowering it as the market evolves. Penetration pricing is setting a low price to enter a competitive market and raising it later. Each of these strategies has its pros and cons and may be appropriate in certain situations.

However, after differentiating your business by building delivery capabilities so that the value promised in a strong UVP becomes reality, your best pricing strategy is value-based pricing. This means setting a price for products and services based on the value the customer believes they are getting from what you are selling. The better you solve people’s problems, which simply means the more value you deliver, the higher the price you can charge for your products and services.

If the product or service offering has been built to match the requirements of a strong UVP – it is relevant to customer problems, delivers beneficial quantifiable value, and is unique in some way – then the business owner and the customer have a win-win outcome when doing business together. When the target customer perceives beneficial value in the solution you offer, then you have a better customer fit. Value-based pricing allows you to be more profitable, meaning you can acquire more resources and grow your business.

You cannot be all things to all people. By establishing a UVP, you are assured that you will be targeting a market segment with a solid customer-to-product fit that will attract the customers who need and will appreciate your offering. The relationship between a UVP and a value-based pricing strategy can lead to greater success.

For more guidance on these topics, contact a NaperLaunch coach or register for the NaperLaunch Academy.

Posted: 
Wednesday, January 27, 2021 - 14:00

4 Steps to Creating a Unique Value Proposition

Unique Value Proposition, Part 1: 4 Steps to Creating a UVP

So you’ve identified a customer problem and built a product or service to solve it. How can you convince potential customers to buy from you rather than the competition? It’s time to define your unique value proposition (UVP).

A UVP is a single, clear, compelling message that states why you are different and worth a customer’s attention. In other words, it’s a promise of value to be delivered.

Understanding how to communicate this value statement is one of the most important parts of developing your business idea. Having a strong UVP will solidify your idea and consolidate your overall message into a simple statement. It will also serve as the starting point for developing your marketing messages.

You can write your own UVP using this 4-step formula:

Step 1: State the end benefit you’re offering.

This single, short sentence should be an attention grabber. It can mention the product and/or the customer.

Step 2: Explain specifically what you offer, for whom, and why it is useful.

Identify your ideal customer (if you already haven’t done this in step 1) and describe how your product solves their problem or improves their situation. Explain why they should buy from you and not from the competition. Keep it concise, no more than 2 to 3 sentences.

Step 3: List the key benefits of what you do/offer.

In a few bullet points, list the specific benefits your product delivers.

Step 4: Evaluate your completed UVP.

Your UVP should clearly answer the following questions:

  • What product or service is my company selling?
  • What is the end benefit of using it?
  • Who is my target customer?
  • What makes my offering unique and different?

Congratulations! You’ve created a first draft of your UVP. Now you can refine it by editing out extraneous words and eliminating jargon. The better you can distill the answers to the above questions to their most basic forms, the more powerful your UVP will be.

In our next blog post, we’ll explain how to use your UVP to develop a pricing strategy for your product or service. This process is also discussed in our Startup Financial Essentials workshop; visit the NaperLaunch Academy webpage for more information and a schedule of upcoming dates.

Posted: 
Monday, January 11, 2021 - 15:30