So, we have the problem defined and have estimated that the project is a good one to do — if its profitable. So how successful will it be as a business? Nobody can reliably predict the future, but we can take a shot at it and see what we learn along the way.
The Fundamental Equations
- Profit = Revenue (Income) – Expenses
- Profit also = ( Margin * Number of Sales ) – Fixed Costs
- Revenue = (generally) Number of Sales * Sales Price
- Margin = Sales Price – Cost
- Cost = What you make of it
- Sales Price < Min( Value to the customer, Price of competitors with same value)
- Number of Sales = Number of potential customers * Conversion Rate
So let’s try to fill in some of these numbers.
Number of Potential Customers
The target audience for the immediate problem is bakeries that are having problems understanding and managing the costs of their ingredients. This suggests that they’re small bakeries with limited numbers of employees who would rather be baking than crunching numbers.
In Canada (as of 2001) there were 1,779 bakery establishments. I have one source that says there were 24,189 bakeries in the U.S. Europe and Latin America are potentially two good areas to find customers, but for now I’m going to concentrate on North America.
As of now, there are several unknowns that prevent me from calculating potential customer base:
- How many bakeries have this particular problem of cost management? I’m assuming that large ones already have systems in place to do this, and so are not potential customers. However, my Domain Expert (the friend who wants this application) says that it’s a large number of the smaller bakeries. She’s been an instructor in the industry for quite a while so I’ll have to defer to her statement for now.
- How many bakeries with this problem would be willing to use software (of any sort) to solve this problem? There’s some logistical problems here: namely that the people involved have to be willing and able to use a computer during their business operations. My Domain Expert says that this isn’t much of a problem; computers are integral for these types of business anyway.
- How many bakeries willing to use software would be willing to pay for it, at any price? You’d think that this would be “all of then”, and it should be if the software solves their problem, but some people seem to resist any sort of cash outlay they consider “unnecessary.” Hopefully this is a small factor.
It’s very easy to fall into the “All we need is X% of the total market to make $Y” trap. Usually this arises from someone coming up with a goal value for Y, deriving an X that amounts to a “small” value, and then assuming that X will be easy to achieve. But that’s not how business actually works: X is the independent variable here and it’s the one that you have to focus on; Y is a consequence of that.
More To Come
I want to keep these posts relatively short, so I’m cutting my analysis off here and saving the rest for another post.
Update: Some Numbers
I got some answers to my questions after I wrote this.