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Direct and Indirect Costs, Cash and Accrual Basis Accounting, Perceived Value. Slides by Emma Tracanella
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Course program1. Italian Startups2. Set up a startup in Italy3. I've got an idea. And now? 4. Value analysis5. Business model6. Communicate, communicate, communicate7. Being net 8. Find your market9. Funding: venture capital, business angel and other ways of financing 10. Pitch
Today's table of content
1. Direct and Indirect Costs
2. Cash and Accrual Basis Accounting
3. Perceived Value
I've got an idea. And now?: quick recap
During last lesson we discussed:
1. General design principles (no ToDo list available..)2. Definition of a project (clear goal that must be
reached in a fixed time using available resources)3. Product life cycle (planning, analysis, design,
implementation, maintenance... maturity and decline or evolutionary maintenance and a new cycle)
I've got an idea. And now?: quick recap
We detailed• Some basics useful from concept to company• What is a lean startup• How to formalize and write my project• Who can help me (Kublai, business incubators,
seed accelerators)
All you need to know about costs
Costs
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore.
Two kind of costs:• Direct costs• Indirect costs
Direct costs
Costs that can be identified specifically with a particular project or activity, or that can be directly assigned to them with a high degree of accuracy.
Direct costs generally includes:• Salary and wages• Material, supplies and equipment
purchased directly for the specific project• Communication and travels costs
Indirect costs
Costs that are not classified as direct
Indirect costs generally includes:• Salary of administrative staff providing
normal support activities• Office supplies, computers• Local telephone calls• Memberships
=> Overhead
Bykes
Direct costs:• Metals• Wages for assembly
Indirect costs:• Abrasive, glue, pink• Rent• Insurance
Actual cost of doing business
• Before you can price a product or a service, you need to know your cost to produce it.
Photographer
• How much charge a photo?
• Minimum fee?
• No costs?
A useful tool: the Cost of Business calculator. It list annual expenses, but it depends on your inputs which can be hard to estimate.
Cost of doing business calculator/1
Expenses• Office and/or studio (rent, mortgage payments,
taxes, insurances, home maintenance, …)
• Phone (cell and/or landline and faxes) – remember to include also the cost of the phone itself
• Photo/Video/Audio Equipment and Accessories
• Equipment services and Repairs
https://nppa.org/calculator
Cost of doing business calculator/2• Computer(s) (harware and software)
• Broadband internet
• Web hosting/Portal services
• Vehicle Expenses (Lease, Insurance, Maintenance)
• Office supplies and Furnitures
• Postage and Shippinghttps://nppa.org/calculator
Cost of doing business calculator/3
• Professional Development
• Advertising and Promotion
• Subsciption and Dues
• Equipment and Business Insurance
• Health Insurance/Deductibles/Copays
• Legal and Accounting Services
https://nppa.org/calculator
Cost of doing business calculator/4
• Taxes and Licenses (Business and Self-Employment)
• Office Assistance (Payroll, Answering Service, Intern, etc.)
• Utilities
• Travel and Entertainment
https://nppa.org/calculator
Cost of doing business calculator/5
Income factors
• Desired Annual Salary
• Non-assigment Income
• Number of Days You Can Bill Per Year
https://nppa.org/calculator
Cost of doing business calculator /6
https://nppa.org/calculator
Accounting
• The difference between cash and accrual basis accounting has to do with the time frame in which revenues and expenses are recorded and reported.
• Cash basis accounting will suffice if your business is a simple one. However, the accrual basis will give a more accurate picture of the results of business operations.
Cash Accounting
• Revenues are reported on the income statement in the period in which the cash is received from customers.
• Expenses are reported on the income statement when the cash is paid out.
Focus on the amount of cash in bank and on making sure all bills are paid.
Accrual Basis Accounting
• Revenues are reported on the income statement when they are earned - which often occurs before the cash is received from the customers.
• Expenses are reported on the income statement in the period when they occur or when they expire - which is often in a period different from when the payment is made.
Provides more information about the business and gives meaningfull financial reports.
Value
• The extent to which a good or service is perceived by its customer to meet his or her needs or wants, measured by the customer’s willingness to pay for it
• It depends more on the customer’s perception of the worth of the product than on its intrinsict value.
How do we create the perception of value when we talk to our customers?
Gillette Fusion
• Amazon’s price: 19.25$
• 8 cartridges
• Cost/cartridge: 2.41$
• You need the razor (11.49$)
Gillette Custum Plus Disposable
• Amazon’s price: 20.97$
• 30 razors
• Cost/razor: 0.70$
Gillette Fusion vs. Custom PlusPrices• 19.25$ vs. 20.97$• 8 cartridge vs. 30 razors
Cost in use• 2.41$ vs. 0.70$
Additional perceived values justify the additional cost in use• Durability of blade• Comfort• Less irritation
Gillette IdeaBy providing something at below the market price (the razor), you can create a market for a secondary product (the blade) upon which you make ongoing profits. The mark-up on the secondary products is disproportionate relative to their cost so were highly profitable for the manufacturer.
3M Scotch® Tape
• Amazon’s price: $1.70
• Lenght 650 inches
• Cost/inch: $0.003
• Cost to hang a poster: $0.01
3M Scotch® Command Strips
• Amazon’s price: $2.70
• 12 strips
• Cost/strip: $0.08$
• Cost to hang a poster: $0.32
3M Scotch® Tape vs. StripsPrices• $1.70 vs. $2.70• Using Scotch Tape, the user can hang 75
posters vs. 3 for the command strips
Cost in use• $0.01 vs. $0.32 to hang 1 poster
Additional perceived values justify the additional cost in use• Less damage to wall• Simplicity to remove• Durability
A-StyleLogo• 1989 stikers on the walls of Milano
and Roma• Patented by Italian designer Marco
Bruns
Clothing Brand• Italian brand founded in 1999
A-style has used street-level buzz marketing to grow to international prominence
Lacoste• Founded in 1933 by the tennis man Rene
Lacoste• At the end of 1990 the company change its
strategy: marketing, retails outlets, product range, …
• Sale of t-shirts in limited series
Re-establishing Lacoste as “a distinctive premium brand”
More Examples
FreemiumGiving away a product that people want for Free and Selling premium products.
• Skype:• A free quality product• Selling cheap calls to ordinary phones
• Only 8% buy something
https://www.freemium.org
4 Freemium Models• Time-limited
• Feature-limited (Dropbox – Flickr)
• Seat-limited
• Customer-type limited
Advertising ModelBecame popular with the growth of radio and TV.
• Indirect revenue from people looking to promote services
• Increasingly difficult
• Youtube, Facebook
Low-Cost Model• Significant volumes of customers (at a low customer acquisition cost) and by charging a very low price
• Revenue from a whole host of ancillary sources
• Ryanair
Analyze Competitors
Next week
Business model.
(with Frieda Brioschi)
