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4/18/2011

Business Terminology Introduction

Steve Ciesinski,
Ciesinski Brian Engleman & Janet Gregory
SRI International
19-April 2011

© 2011 SRI International

Business Terminology Introduction
Topics
• Market
• Customers
• Partners
• Making Money
• Building Value
• Using Money Wisely
• Making Investors Happy

© 2011 SRI International

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4/18/2011

Business Terminology: Part 1 
Setting off on the journey

You are here You want to get there


Partners 
Market
Customers
Will get you there
… if …

© 2011 SRI International

Business Terminology: Part 2
Navigating the journey

You are here You want to get there


… if … 
You do these things in an intelligent manner:
Make Money
Build Value
Use Money Wisely
Make Investors Happy

© 2011 SRI International

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4/18/2011

Framework for the Day

• Expectations
– Broken into general sections
– Introduction, non‐exhaustive
– Can’t do a 2‐year MBA in one day
– Loosely follows SRI Business Plan Basics week‐long course
• Approach
– Concept first
– A few definitions
– Team exercise to apply concepts
– Use athletic shoe example

© 2011 SRI International

Business Terminology Introduction
Topics
• Market
• Customers
• Partners
• Making Money
• Building Value
• Using Money Wisely
• Making Investors Happy

You are here You want to get there

© 2011 SRI International

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4/18/2011

Market
What business are you in?  Where is here? 

• Market Concept
– Define a go‐to‐market strategy
– Identify industry classification
– In what industry segment will you generate revenue
– How much of that industry segment will buy from you
• Key terminology
– TAM = total addressable market
– SAM = specific addressable market
– Market share
You are here
----
With a great idea

© 2011 SRI International

TAM = Total Addressable Market

• The larger industry or market that you are part of

• Important to your business
– Total market opportunity (size)
– Industry behavior (maturity, growth expectations, trends)
– Industry classification (US: NAICS – MY: Dept of Statistics) Your Customers
– Identify key industry players

Overall Market

© 2011 SRI International

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4/18/2011

SAM = Specific Addressable Market

• The specific industry or market segment that you serve

• Important to your business
– The market opportunity accessible to your business (size)
– Common needs with similar response to sales & marketing actions
– Identify competition Your Customers
– Bigger SAM is more interesting to investors

Market Segment

Overall Market

© 2011 SRI International

Market Share
• The portion of the market that you can “own” over time

• Important to your business
– Establishes the size of your business
– Sets goals for sales & marketing actions
– Realistic market share goals are important to investors
– Identify key business considerations and risks
• Competitors
• Geography
• Time
• Resources

© 2011 SRI International

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4/18/2011

Business Terminology Introduction
Topics
• Market
• Customers
• Partners
• Making Money
• Building Value
• Using Money Wisely
• Making Investors Happy

You are here You want to get there

© 2011 SRI International

Customers
Who is going to buy this stuff?

• Concept
– Identify how buyers buy
– Ascertain best ways to reach buyers
Ascertain best ways to reach buyers
– Pinpoint best price maximize sales
– Describe sales process
– Define marketing plan

• Key Terminology
– Buyer behavior
– ASP = average selling price
– Customer acquisition

© 2011 SRI International

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4/18/2011

Buyer Behavior
• The process that buyers go through to make a buying decision

• Important to your business
b
– Determines sales cycle time
– Establishes sales process
– Defines the marketing plan
– Affects volume & growth

Marketing Plan
Awareness Preference Decision
Sales Process
Suspect/Prospect Qualified Prospect Customer

© 2011 SRI International

ASP = Average Selling Price
• The price that will customers pay for a product / service

• Important to your business
Important to your business
– Pricing strategy : Ability to command & hold the highest possible price
• Compelling buyer need / want / desire
• Limited supply: unique, not commoditized, few substitutes
• High value relative to competition & difficult for competition to respond
– Price elasticity
• Small change in price results in large change in demand (elastic)
• Price changes have no significant effect on demand (inelastic)
g g ( )
– Competitive positioning
– Price change expectations over time

© 2011 SRI International

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4/18/2011

Customer Acquisition
• The method to attract and sell to customers

• Important to your business
Important to your business
– Establish best sales channel option(s)
• Internet store
• Call center / Tele‐sales
• Store front
• Face‐to‐face “direct” selling
• Solution provider (VAR = value added reseller)
– Determines cost of sales
– Reveals “throttle” for volume

© 2011 SRI International

Business Terminology Introduction
Topics
• Market
• Customers
• Partners
• Making Money
• Building Value
• Using Money Wisely
• Making Investors Happy

You are here You want to get there

© 2011 SRI International

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4/18/2011

Partners
Who can help you succeed?

• Concept
– Internal staffing versus outsourcing
– How product/service is turned into customer benefit
How product/service is turned into customer benefit
– External opportunities and risks

• Key Terminology
– Value chain
– Business ecosystem
– Sales channel

© 2011 SRI International

Value Chain

• How the product / services turns into customer benefit

Raw
Raw  Build /
Build /  Your
Your 
material Mfg business
Service Channel Buyer

• Important to your business
– Internal operations versus outsourcing
– Identify resource requirements
– Establish COGS (cost of goods sold)
( g )
– Suppliers & distributors required
– Relationships & partnerships required

© 2011 SRI International

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4/18/2011

Business Ecosystem

• Extended enterprise and business environment that affects your business 
• Important to your business
– Regulatory requirements Extended Enterprise
– Supply chain
– Complementary offerings Core Business
Products / Services
– Buyer versus user
Suppliers & Distributors
– Other factors Buyers 
– External risks
Standards Suppliers of
Bodies Users suppliers

Suppliers of Complementary
Products and Services

© 2011 SRI International

Business Ecosystem

• Extended enterprise and business environment that affects your business 
• Important to your business Business Environment
Business  Environment
– Regulatory requirements Extended Enterprise
– Supply chain
Government Investors
– Complementary offerings Core Business
Products / Services
– Buyer versus user
Labor Suppliers & Distributors
– Other factors Unions Buyers  Natural
– External risks Resources
Standards Suppliers of
Natural
Bodies Users suppliers
Disasters
Suppliers of Complementary
Products and Services
Environment Other
Trade Associations Stakeholders
Competitors Consumer Groups

© 2011 SRI International

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4/18/2011

Sales Channel

• Point of persuasion: where buyer exchanges money for products or services

• Important to your business
b
– Internal operations versus outsourcing
– Customer acquisition
– Inventory
– Sales margin

© 2011 SRI International

Business Terminology Introduction
Topics
• Market
• Customers
• Partners
• Making Money
• Building Value
• Using Money Wisely
• Making Investors Happy

You are here You want to get there

© 2011 SRI International

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4/18/2011

Making Money
What happens to money collected from sales?

• Concept
– Revenue drivers
– Business models
Business models
– Making money profitably

• Key terminology
– Revenue
– Margin
– Profits ☺ (and losses  )

You want to get there

© 2011 SRI International

Revenue

• Money that your company receives

• Important to your business
b
– Possible sources of early revenue 
– Revenue ramp & growth
– Payment policy (event driven, subscription, revenue sharing, other)
– Collection policy (% advance, cash‐on‐delivery, 60‐days net, other)

2011 2012 2013 2014 2015


T t l Units
Total U it 2 100
2,100 6 685
6,685 16 240
16,240 47 775
47,775 109 900
109,900

Price (ASP) $900 $945 $992 $1,042 $1,094

Total 
$1,890 $6,317 $16,114 $49,775 $120,226
Revenue
Cash 
$0K $5,000 $9,810 $29,865 $72,135 $ = in thousands (except price)
Collected

© 2011 SRI International

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4/18/2011

Margin
• Difference between the cost and the selling price, typically expressed as a 
percent
You’ve heard the story about the man who bought
Panama hats in Ecuador for $3.25 and sold them in
• Important to your business
I b i this country for $3. “You’re losing a quarter on each
one,” he was told. “Yeah, but I’ll make it up on
– Revenue drivers
volume,” he replied.
• Volume, unit or usage based
• Subscription, recurring
• Licensing Fred Remington, Pittsburgh Press
May 18, 1962
– Cost drivers
• Variable unit production cost Margin Calculation 2011
• Fixed asset cost
Fixed asset cost Revenue $1 890
$1,890
• Cost of capital, raw materials, etc.
‐ COGS $1,092
– Sustainable margin
Gross Margin $   798
• Relation of revenue to cost
• Is margin sustainable over time? How? % (GM/Rev) 42%

© 2011 SRI International

Profit & Loss
• What remains when cost of bringing the product to market is subtracted 
from the selling price (or revenue)
– Profit: excess of revenues over expenses ☺
– Loss: expenses exceed revenue 
2011 2012 2013 2014 2015 Notes
Revenue
Total Units     2,100     6,685     16,240     47,775     109,900 ~35k/school, 3% pntr
Price $     900 $     945 $       992 $    1,042 $      1,094 Avg. Price; 5% growthDirect Costs:
Total Revenue $ 1,890 $ 6,317 $ 16,114 $ 49,775 $ 120,226 Directly related to 
Total COGS $ 1,092 $ 3,491 $    8,520 $ 25,182 $    58,214 Mfg & Shipping producing each item
Gross Margin $     798 $ 2,826 $    7,594 $ 24,593 $    62,012
% of Revenues 42% 45% 47% 49% 52%
SG&A/Overhead
Costs as a % of Revenue
Sales $19 $126 $483 $1,991 $6,011 Support Only
Advertising Spend $142 $537 $1,531 $5,226 $13,826 Indirect Costs:
Local Marketing
Salaries $600 $1,879 $4,468 $12,796 $28,471 $100/bike comm + Exec, Mgrs
Overhead $       19 $       63 $       161 $       498 $      1,202
Not directly attributable 
1% of Rev ‐ Rent, etc
Total SG&A & Overhea $     780 $ 2,605 $    6,643 $ 20,511 $    49,510 Fixed or Variable
Total Operating Costs $ 1,872 $ 6,096 $ 15,163 $ 45,693 $ 107,724
Operating Income $       18 $     221 $       951 $    4,082 $    12,502
Taxes $          6 $       77 $       333 $    1,429 $      4,376
© 2011 SRI International
Net Income $       12 $     144 $       618 $    2,653 $      8,126

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