S7 E13-16 Production Costs. Be sure your business will make money before you launch. Planning ahead leads to success with Jeremy Gray

Jeremy Gray – Practical Solutions to Difficult Problems
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S7 E13-16 Production Costs. Be sure your business will make money before you launch. Planning ahead leads to success.
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Episode 13. What you must know about your Production Costs to have a profitable business.

1. Whatever type of business you are in you will have production costs. Whether you are manufacturing a physical item, providing a service, or selling software
   
2. Until you understand your cost of production you cannot be sure your business will be profitable. 
   
3. It is a key part of your break even analysis, the number of units you need to sell to meet all your costs. Beyond that number you move into profitability.
   
4. There are different ways to determine production costs and which is most important to you depends on your type of business.
   
5. The most widely used production costs are:
   
   1. Fully Allocated Costs – This includes marginal costs and fixed production overheads.
      
   2. Variable costs. This reflects how costs will vary depending on the level of production
      
   3. Marginal costs – This is the cost to produce one more unit. 
      
6. The elements of production costs.
   
   1. Fixed costs are the costs that must be paid whether any products or services are produced or not. For a restaurant this would be the rent, property taxes. In our restaurant example staff costs can be considered fixed. Note there is no such thing as fixed costs. Even fixed costs can be adjusted. You can reduce rent by moving to smaller or less expensive premises. Maybe it is better to think of them as semi-fixed.
      
   2. Marginal costs or Direct Marginal Costs is a measure of what it costs to produce one more unit. In a manufacturing situation this would be the raw materials required, the labor costs, utilities, direct supplies etc. In software sales the marginal costs could be minimal. How much does it cost to download another unit? For software most of the costs are upfront.
      
   3. Variable costs are as the name implies variable based on the quantity produced. It is the fixed costs divided by the expected production plus the marginal cost. This can provide you with a sensitivity analysis. Use your sales projection to calculate your expected variable cost and then adjust your sales projections up and down to see how costs vary with different sales levels.
      

1. Which is right for you? To some extent this will depend on the industry you are operating within. However variable costs which includes both elements fixed and marginal is probably your best starting point. This will provide the basis for developing your pricing strategy and assessing whether your long term business can be viable. In earlier episodes we discussed Demand Validation so you have an estimate of the number of units you can expect to sell and to some extent the price your product or service can command. If this is higher than your variable production costs, then good. The bigger the gap the better. If not, then it’s back to the drawing board. But this does not mean you need to abandon your idea yet. 
   
2. Reassess your production costs – can they be reduced? Can some features be eliminated but still deliver value to the customer?
   

Tags: How to start a business; Achieve start up success; Production Costs; How to calculate your production costs; Production costs key to profitability, The successful entrepreneur; business common mistakes; small business start up; avoid these common mistakes of business; mistakes in business; IBGR.network; Jeremy Gray; Practical Solutions to Difficult Problems
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Episode 14 Production costs too high?  Find the best way to reduce your costs.
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Cost is usually a balance between good, fast and cheap. You can have two of the three but not all of them.

1. If you find that your variable costs are more than your customer is willing to pay but you still believe in your idea what options are open to you?
2. Continue regardless in the belief that at some point sales volume will reduce your variable cost below the price point and profitability will follow. This is a viable option if you have the funding. Amazon is a prime example.
3. But if you cannot afford to wait for profitability, consider these options:
   1. Find someone who can manufacture your product for you. A toll manufacturer.
      1. A toll manufacturer is a company who takes raw materials supplied by you and converts them into finished goods.
      2. Could be an option if your products do not require specialized manufacturing processes.
      3. Quality control needs to be maintained. You will not be the toll manufacturer’s only customer.
      4. Accounting for materials can be a challenge.
   2. Your marginal costs are likely to be higher than making it yourself, but your fixed costs will be much lower. This may bring your variable costs below the expected selling price.
   3. White labeling is another option to explore. This is similar to toll manufacturing but the producers purchases and uses the materials required to make the product. This is likely to be more expensive than toll manufacturing but is more friendly to your cash flow. Supplier may ask for take or pay contract.
   4. These are not second-class strategies, they are used by huge MNCs such as IKEA and Skype
4. Use a modified form of sustaining engineering. Used by existing companies to reduce the cost of the products to improve profitability, match competitors pricings or drive volume. Do further research to identify lower cost sources or alternative materials which are less expensive. Look at all costs – an alternative form of packaging could deliver savings.
5. Negotiate with potential suppliers. Guarantee 100% of your needs will be bought from them. May not get you much but at this stage every percent counts. Give them a reason to reduce their prices to you
6. Value engineer your product. In your enthusiasm for your product you may have over designed it.  Look at your features incorporated in your design? Do some add only marginal benefit? Will some only be used by a niche customer? Scope creep is a common failing. 
   1. Turn this into a positive. Your stripped-down version can be your initial offering, the original design maybe your 2.0. 

Tags: How to start a business; Achieve start up success; Production Costs; How to reduce your production costs; Production cost control; cost versus benefit analysis; The successful entrepreneur; business common mistakes; small business start up; avoid these common mistakes of business; mistakes in business; IBGR.network; Jeremy Gray; Practical Solutions to Difficult Problems

Episode 15 – Launching a B2C business? Why you should be thinking about your customer loyalty programs now.
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1. Why should I be thinking about a customer loyalty program even before I launch my business. I am not ready to give discounts and I don’t even have any customers yet. This is an understandable reaction.
2. Many companies have loyalty programs. Why? Do they like giving away money? Loyalty programs are huge profit generators. Airlines make billions of dollars from their loyalty programs. But even if you are not an airline
   1. Keeping an existing customer costs up to five times less than winning a new one.
   2. It’s easier to persuade a customer who already knows you to buy again and/or buy more from you.
   3. 20% of customers are typically responsible for 80% of a company’s revenue.
3. Your most loyal customers will be your most profitable. With each additional year of a relationship, customers become less costly to serve. Over time, as the loyalty life cycle plays out, loyal customers even become business builders: buying more, paying premium prices, and bringing in new customers through referrals.
4. Your early customers will likely be the customers who believe most strongly in your product or service. It resonates with them so strongly that they are willing to take a bit of a gamble in doing business with a company with no track record.
5. So doesn’t it make sense to take steps to ensure their loyalty from day one. 

Somethings to consider when designing your customer loyalty program:

1. What incentive are you going to offer? Points? Cash back? Gifts?
   1. Starbucks uses points that can be redeemed for free drinks, food, discounts – provides flexible options.
   2. Surprise gifts can be a great builder of loyalty.
2. What behaviors are you trying to drive? If you want customers to interact via an App, reward them for using the App. Regular purchases? Consider a higher reward for those customers who repeat a purchase within a certain time frame.
3. Think of your ideal customer and personalize your loyalty program for them. 
   1. Sephora’s loyalty program has a three-tier program. You can join for free and as you get more points you progress up the tiers you get access to better rewards.
4. Give back to the community in a way that is meaningful to your customers. Patagonia, the outdoor clothing company, gives 1% of its sales to environmental causes. If you are selling books you could give to literacy charities. 

Tags: How to start a business; Achieve start up success; The successful entrepreneur; Customer loyalty programs, customer rewards; repeat purchases; pricing strategy; business common mistakes; small business start-up; avoid these common mistakes of business; mistakes in business; IBGR.network Jeremy Gray; Practical Solutions to Difficult Problems

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Episode 16 – Research shows that stage presence is the leading predictor of success when pitching to investors. Improve your stage presence with these 6 tips
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1. Research published in the September/October edition of Harvard Business Review found that stage presence was the leading predictor of success in gaining funding from investors.
2. Sadly 75% of people suffer from Glossophobia or the fear of public speaking. And if you are nervous your stage presence will not be ideal. But it can be improved with these ideas.
   1. Solid preparation of what you want to say will improve your confidence, be sure of your facts, Practice Practice. but this alone may not be enough to deliver a strong stage presence.
   2. Think like your audience, if you come on stage, go behind the podium and stand rigidly – the signal to the audience is that you are uncertain. If you come on the stage in a confident manner, without notes and an open body language this conveys confidence and competence.
   3. Do not be static. Move around when presenting. How much you move depends on the size of the audience. If it is a large room you should move from one side of the stage to the other in a smooth flow, stopping at times, the objective is to engage the entire audience. Not to have their heads snapping from side to side as if watching a tennis match.
   4. Use the stage as a prop to your talk. The back of the stage is to deliver the big picture, the facts, the background setting the scene. The middle of the stage is for the main content of your pitch, the why investors should be interested in what you have to say. The front of the stage is the area of greatest intimacy with your audience. This is where you make the ask, will you invest in my business and here is why you should.
   5. If the area is limited, TED speakers are told that they have to stay on a little red carpet on the stage. Consider how effective most TED speakers are at conveying their message. If you have limited space decide where you will stand and use gestures to convey your enthusiasm
   6. When presenting live your first impression is not made when you start speaking, it starts when you enter the stage. Plan your entrance, know where you will stand. This will make our entrance confident and purposeful. 

Tags: How to start a business; Get funded, Pitching to VCs Achieve start up success; The successful entrepreneur; Customer loyalty programs, customer rewards; repeat purchases; pricing strategy; business common mistakes; small business start up; avoid these common mistakes of business; mistakes in business; IBGR.network Jeremy Gray; Practical Solutions to Difficult Problems