May 16, 2010 by Craig
This is a continuation of my previous post.
Conversion Rate
Here be dragons. I’ve yet to see anyone come up with reliable predictions or techniques to make a paying customer out of a potential one. In fact, a lot of what I’ve read suggests that you should not even try to estimate or manipulate this figure until you’re already in business and have some existing data to work from. Until you have real numbers, it’s all guesswork.
The good news is that the number may be even better than you think. There have been lots of runaway successes in the Internet age. Also, this is where all of the upside comes from once you’ve built the business. Today’s battle plan is to launch the business and then use real-world experience to increase this number.
I think that the best thing you can do at this stage in the came is to make a good, solid product that evolves to meet customer needs. The conversion rate will be evidence of that.
Value to the Customer
I don’t have numbers for this yet but I do know what information I want:
- How many different products does a bakery make at a given time?
- How many units of each product does a bakery produce in a given time period?
- How many units does the bakery sell? The difference between this and the production number equals the waste.
- How much on ingredients does the bakery spend? Multiply this by the waste percentage to find out the potential for waste reduction.
- How much waste could be eliminated through better planning (via this software)? The goal is 100% but that’s probably unrealistic.
These are the numbers to research.
Multiply the waste reduction by the ingredient cost and you have the maximum value to the customer. Reduce that by some factor to account for inefficiency in the process. (For example: it will take some time to use the software, and that time amounts to a reduction the customer’s net value from the product).
The price of the product must be below this number.
Competition
A big factor in the conversion rate is the value of other players aiming for the same market. One of the reasons I was approached in the first place is that there wasn’t a lot of suitable existing products for my domain expert/first customer. The products that are out there are often:
- Expensive. There’s one for about $250 (outright purchase), but the more common price points are $700, $1200, and $2500. That’s fairly daunting up-front cost for a small bakery who is not sure of the overall benefit.
- Hard to use and learn. In my initial discussion, the phrase “something simple to use” came up more than once.
- Desktop software, meaning that they need to be installed and maintained on-site. That’s not great for a business with small to none in-house expertise.
- Have limited or no trial options before purchase. Even when there is a trial option, you have to download & install it: it’s not very smooth.
- Ugly, both in the program itself and in the company website. Ugly suggests shoddy.
These are all vectors that I can take advantage of.
The whole point to getting customers, of course, is to get money from them, which will be my next post in this series.