Running the right numbers at the bo p elac 2015

*So Erik Simanis, MBA, PhD Partner, The Intrapreneur Lab www.eriksimanis.com

Running the RIGHT Numbers at the Bottom of the Pyramid

© 2015, Erik Simanis 2

Conven)onal “top-‐down” approaches to making the business case conceal unrealis)c assump)ons about four key business unit variables

(R, B, T, & L) that oGen dictate profitability.

Companies go to pilot with

products at price points/margins that have no

path to profitability.

The Problem


Top-Down Business Case

Total Market Size Yr 1 Conversion Rate Avg Annual Consump)on X

= Total Volume Yr 1

X

Total Volume Current COGS X

= Total Contribu3on Yr 1

X

NPV analysis, assuming an ini)al cap ex cost and standard CAGR in volumes over investment period

Lower Margin

Fixes the Price Point


The Accelerating Treadmill

Travel further and further

away

Hire more people

Opera)onal costs escalate

Not hiXng target sales Raises target sales


The Traditional Channel

Distributor Business

Retailer Business B2C

MNC

B2B MNC

Professional Marketing Low Touch Channel


The Channel Gap

B2C MNC

B2B MNC

Low-Income Mass Market

?

High Touch


Channel Constraints

Poor Infrastructure Pushes Down the Maximum Efficient Scale of the Business Unit

High-touch Sales Drives Up the Business Unit’s Fixed Labor Cost

Scale Cost Structure


?

The Business Unit

= HEAD OFFICE

BUSINESS UNIT Territory 1


BUSINESS UNIT Territory ~ n



Coordina(on)&)Scale)

Economies)

Product(

Cash(

Product(

Cash(

Product(

Cash(

Product(

Cash(

Product(

Cash(


Village 1 Village 3

Village 4

Village 8

Village 7

Village 5

Village 9

Village 2

Price = $1.00/HH/MO Margin = 20% Cont/HH/MO = $0.20 B/E Penetra)on: 10,000 HH % of Total Pop = 100%



REACHABLE TARGET POPULATION: 10,000 HH Village 10

Business Unit (Branch)

BIZ UNIT OPERATIONAL COSTS/MO: $2,000

Low Margin, High Volume Myth

Village 6


Business Unit Economic Drivers

Reachable Market (R)

Monthly Customer

Transac3ons (T)

Customer Base (B)

Monthly Customer Sales Load

(L)

REVENUES

COSTS Business Unit

Profits

+

+

=


Business Unit’s Whole Cost Structure

Es)mate Business Unit’s Opera)onal

Costs

Allocate Head Office’s

Opera)onal Costs

Es)mate Business Unit’s Investment

Costs

Allocate Head Office’s

Investment Costs

TOTAL OPERATIONAL COSTS

TOTAL INVESTMENT COSTS

Bound the Business Unit

& Head Office

Calculate Required Price

& Margin

P&L NPV +

Bottom-Up Modeling


1. Bound the Biz Unit (a)

Fix Geographical Reach (R)


Business Unit Reach (Total # Households in Area) 150,000 % BOP Households 57%% Households with Children 30%Available Target Market (Households) Per Biz Unit 25,470

Available Target Market 25,470 Steady State Penetration Rate 15%Customer Base: 3,821

Customer Base 3,821 Product Lifespan (months) 1 Repurchase Rate 75%Monthly Customer Transactions: 2,865

Business Unit Target Market

Business Unit Customer Base At Scale

Business Unit Monthly Transactions

1. Bound The Biz Unit (b)








Customer Base (B) = Avail. Target Mkt x Steady-‐State Penetra3on Rate










Transac3ons/Mo (T) = Customer Base x Prod Lifespan x Repurchase Rate








1. Bound The Head Office (c)

HEAD OFFICE

Bangladesh Urban Population (Households) 6,065,000Business Unit Reach 150,000

Business Units at Scale: 41

# Business Units at Scale


Salespeople Per Business UnitTotal Customer Transctions/Mo 2865Days/Month Available For Customer Visits 15Customer Visits/Day/Salesperson 5Size of Customer Group 2

Required # of Salespeople: 20

HEAD OFFICE

BUSINESS

UNIT

2: Total Operational Costs (a)

Set Customer Load/Salesperson (L)

Set Biz Unit Load/Territory Manager

Business Units at Scale 41Business Unit Load/Territory Manager 6

# Territory Managers: 7

Territory Managers


2: Total Operational Costs (b)

Unit Cost (Taka) Units

Total (Taka)

Total (USD)

Wage + Benefits:General Manager 40,000 1 40,000 500 Sales Supervisors 18,000 2 36,000 450 Salespeople 10,000 20 200,000 2,500 Delivery People 7,000 5 35,000 438

Transportation Allowance:General Manager 200 22 4,400 55 Sales Supervisors 150 44 6,600 83 Salespeople 100 440 44,000 550 Delivery People 50 110 5,500 69

Phone Allowance:General Manager 200 22 4,400 55 Sales Supervisors 150 44 6,600 83 Salespeople 75 440 33,000 413 Delivery People 50 110 5,500 69

421,000 5,263

Monthly HR Expense for Business Unit Item

Delivery CyclesComputersTabletsPhonesPrinterOffice Equip/Furniture

Total:

Monthly Depreciation Expense for Business Unit

Unit Cost (USD) Yrs Dep.

1,875 5 2,625 3 6,000 3

719 3 300 3

1,250 3


Mos Dep60 36 36 36 36 36


Dep. Expense (Monthly-USD)

31 73

167 20 8

35 334


Delivery Cycles MaintenanceSales Uniforms RentMarketing (per Customer)SGA

Monthly General Operating Costs for Business Unit

Unit Cost (USD) Units

10 5 4 13

200 1 0.30 2,865

65 1


Total (USD)

50 47

200 860 65

1,221


1. HR Expense

2. CAP Asset Dep. Expenses

3. Gen. Opera3ng Expense

HEAD OFFICE

(Allocation)

BUSINESS

UNIT

+


3: Total Investment Costs

1. Working Capital Expense

HEAD OFFICE

(Allocation)

BUSINESS

UNIT

+

USDHuman Resource Expense/Mo 5,623 General Operating Expense/Mo 1,221

Total 6,844 Average Monthly Working Cap Exp. 3,422

Months to Reach Target Sales 16Total Start-up Working Capital Expense 54,756

Investment Period (Mos) 60Monthly Start-up Working Cap Exp 913

Monthly Start-Up Working Capital Expense Business Unit




HEAD OFFICE

(Allocation)

BUSINESS

UNIT

+

2. Investment Returns

USDWorking Capital 54,756 Capital Assets 12,769

Total 67,525

Target Rate of Return 35%Required Return on Investment 23,634

Investment Period (Mos) 60Monthly Investment Returns 394

Monthly Required Investment Returns Business Unit









HEAD OFFICE

(Allocation)

BUSINESS

UNIT

+

2. Investment Returns

USDWorking Capital 54,756 Capital Assets 12,769

Total 67,525

Target Rate of Return 35%Required Return on Investment 23,634

Investment Period (Mos) 60Monthly Investment Returns 394

Monthly Required Investment Returns Business Unit






3. Income Tax

Monthly Working Cap + Investment Returns 1,307Tax Rate 28%

359

Monthly Income Taxes= Profit Ader Tax


Product Bundle 1 2.65Packaging & Label 0.05Coupon 0.02Loyalty Awards 0.63

3.35

Total Operating (Biz Unit + HO Allocation) 7,183Total Investment (Biz Unit + HO Allocation) 1,749# Sales Transactions/Mo 2,865

3.12

Variable Costs/Transaction 3.35Whole Costs/Transaction 3.12

Target Price: 6.46

Membership Price 6.46Total Variable Costs 3.35

Target GM: 48%

Target Price & Margin1. Variable Costs/Transaction

2. Biz Unit Whole Costs/Transaction

Target Price

Target Gross Margin

4: Set Required Price & Margin (Method A)

Variable Costs Per Transac3on

Whole Costs Per Transac3on

Required Price & Margin

+

=

4: Set Required Price & Margin (Method A)


Total Operational Cost/Mo 7,183Total Investment Cost/Mo 1,749Transactions/Mo 2,865Cost/Transaction 3.12

Price $3.75 $5.00 $6.46 $8.00Gross Margin 83% 62% 48% 39%Contribution $3.12 $3.12 $3.12 $3.12Cost of Goods Sold Limit $0.63 $1.88 $3.34 $4.88

Method B: Target Price & Margin

4: Set Required Price & Margin (Method B)

= Required Contribu)on/Trans.

Contribution $3.12 $3.12 $3.12 $3.12Cost of Goods Sold Limit $0.63 $1.88 $3.34 $4.88


OPERATING DRIVERS Monthly %Unit Sales

Eye Glass PackagesBasic 298 25%Premium 595 50%Deluxe 298 25%

TOTAL: 1,190 100%Add-Ons %

Lenses 1,488 25%Arms 1,488 25%Accessories 2,975 50%

TOTAL: 5,950 100%

GROSS SALES RS %

Eye Glass Packages 1,128,442 52.7%Add-Ons 1,012,056 47.3%

TOTAL 2,140,498 100%

Whole Cost P&L

Creating a Whole Cost P&L (a)


COST OF GOODS SOLD RS %Eye Glass Packages

Basic 90,738 7.2%Premium 324,275 25.8%Deluxe 248,413 19.7%

Add-OnsLenses 260,313 20.7%Arms 111,563 8.9%Accessories 223,125 17.7%TOTAL 1,258,425 100%

CONTRIBUTION RS %Eye Glass Packages 465,017 53%Add-Ons 417,056 47%

TOTAL 882,073 100%

WHOLE COSTS RS %I. TOTAL OPERATIONAL COSTSBUSINESS UNIT:

Human Resources 383,700 43.5%Capital Asset Depreciation 69,306 7.9%General Operating 198,959 22.6%

HEAD OFFICE, ALLOCATION:Human Resources 21,392 2.4%Capital Asset Depreciation 743 0.1%General Operating 8,928 1.0%

TOTAL: 683,026 77.4%II. TOTAL INVESTMENT COSTSBUSINESS UNIT:

Working Capital 97,110 11.0%Investment Returns 59,023 6.7%

HEAD OFFICE, ALLOCATION:Working Capital 24,256 2.7%Investment Returns 731 0.1%

TOTAL: 181,120 20.5%III. TAXESBUSINESS UNIT 17,707 2.0%HEAD OFFICE, ALLOCATION 219 0.0%

TOTAL TAXES 17,926 2.0%WHOLE COSTS 882,073 100%SURPLUS PROFITS 0

Creating a Whole Cost P&L (b)

*So Erik Simanis, MBA, PhD Partner, The Intrapreneur Lab www.eriksimanis.com

Running the RIGHT Numbers at the Bottom of the Pyramid

Running the right numbers at the bo p elac 2015

Leadership & Management

Transcript of Running the right numbers at the bo p elac 2015