With the Support of:

www.de-pe.com @depeteam

Antofagasta, Chile, June 2011

What’s the Idea and

How Large is the

Opportunity

Class 7

1

INDEX • Customer Development Process Review

– When to move out of Customer Discovery & Customer Validation

• Your business strategy – Identify your market

• How to size the market – Market Analysis Questions

– Top down vs. Bottom Up • Examples

PEOPLE Los emprendedores invitados

ayni Quechua {sust} : ayuda mutua

La Historia

Carolina Andrade

¿Quiénes somos?

ayni

La plataforma virtual (web) socialmente responsable que ofrece una selección única de accesorios exóticos

Somos un baúl de tesoros artesanales del mundo

Impacto Social

• Responsabilidad social - comercio justo

• Asociaciones con ONGs para promover programas de educación sanitaria

• Impacto tangible en comunidades de artesanos

11

Socios Claves • ONGs • Directorio • StartUp Chile

Actividades Claves • Diseño de una página web diferenciada • Cuidadosa selección de producto • Optimización de cadena de producción, alto involucramiento en proceso

Propuesta de Valor • Conectar al artesano con el consumidor final de una manera tangible • Ofrecer productos únicos y de moda y una experiencia de compra

Relación con Clientes • Página web • Redes sociales • Eventos deportivos

Segmento de Clientes • Consumidor socialmente responsable y afluente entre los 25 y 40 años en el mercado norteamericano

Estructura de Costos • Promoción • Página web • Inventario, flete y aduanas • Personal (marketing y operaciones)

Revenue Stream • Ventas en línea • Ventas a través de tiendas físicas

Recursos Claves • Capital • Diseñadores y programadores • Know-how de marketing y procesos

Canales • Página web • Boutiques o tiendas selectas • Flagship store

-

-

Source: Business Model Canvas, © 2009 Alexander Osterwalder & Yves Pigneur

TIP

• Ejecución es mejor que parálisis: tomar decisiones con información incompleta y probar las ideas lo más pronto posible

Customer

Development

Process Review

The Goal

To determine if there are customers and a market for the vision that is developed by the founders and the product development team.

– Not to gather feature lists from perspective customers, nor is it to run lots of focus groups.

Find out who the customers for your product are & whether the problem you believe you are

solving is important to them

The Goal

Customer validation proves that you have found a set of repeatable customers and a market who

react positively to your product

The Goal

Create end user demand and scale that demand into the company’s sales channel.

Key Marketing Spending & Where you take investment.

The Goal

Transitioning the organization from one that is designed for learning and discovery to a well-

oiled machine engineered for execution.

The Goal

Where we

are at

Discovery & Validation

Tells you the following • Verifies your market • Locates your customers • Tests the perceived value of your product • Identifies the economic buyer

– who’s budget pays for your product - different from user in some cases)

• Establishes your pricing and channel strategy • Checks out yours sales cycle and process

Discovery & Validation

• Have we identified a problem a customer wants solved? • Does our product solve these customer needs? • If so, do we have a viable and profitable business model? • Have we learned enough to go out and sell?

?

Get out of the Building!!

Don’t be these guys

• Fastoffice, 1994

– Raised 8 million USD

– 18 months development

– Product: a device that would offer fax, voicemail, intelligent call forwarding, email, video and phone calls

Great Product, Raw Market

Product Price: $1395

Your Strategy

Existing Market

Resegmented Market

New Market

Customers Existing Existing New/New Usage

Customer Needs Performance 1. Cost, 2. Perceived

need Simplicity and convenience

Performance Better/faster

1. Good enough at the low end

2. Good enough for new niche

Low in “traditional attributes,”

improved by new customer metrics

Competition Existing,

Incumbents Existing Incumbents

Non-consumption / other startups

Risks Existing

Incumbents

1. Existing Incumbents,

2. Niche Strategy Fails Market Adoption

Market

sizing/estimations Estimating the number of buyers of a particular product, or users of a service

Market Sizing Analysis

Questions

1.What does the venture do “best”, and more importantly, “better” than others? –

2.Who will pay for the venture’s offerings, and are there enough such players ready to pay?

3.How much are potential customers currently paying for similar offerings/ needs?

Market Sizing Analysis

Questions

4. How much value is the venture delivering to customers, and how much will they be potentially ready to pay for its offerings?

5. Assign a number to the value you are delivering to customers. Is it critical. Is your offering saving them $100 or $20?

6. Do the economics work out in the target customer base?

Market Sizing Analysis

Questions

7. How much value or “wallet share” is the venture capturing out of the client’s budget?

8. Who is the venture’s REAL competition? • For Coke and Pepsi, more than each other,

their competition is with the homemade lassi, nimbu pani, juices and even drinking water.

Market Sizing

• Market Sales Potential (MSP) – Prospective Buyers (B) * Quantity Sold (Q) * Price (P)

• The main purpose of market sizing is used – To inform business viability,

• specifically go/no-go decisions,

– Key marketing decisions • pricing of the service or marketing tactics to increase usage.

– Preliminary estimate of the level of operational and technological capabilities required to service the expected market.

The Cost-Revenue Model

Revenue Cost

Price Quantity Fixed Variable X ) ( + ) • Price

discrimination

• Changes in

pricing

structure

• Viability of

pricing over

time

• Discounts or

couponing

• Competitor’s

pricing

• Customer

segmentation

— New/existing

— Loyal/

switchers

• Channel

restrictions or

temporary

disturbances

• Changing

consumer

demands

• Capital

equipment

• Land

• Buildings

• Labor

• Materials

• Energy

—

Profit

(

Market Sizing Methods

• Top-down Approach

– involves defining a “universe” target market and applying various filters that continually reduces the figure to an estimation of the total addressable market

There are a billion people in China; 70% of them do not have 20/20 vision; eyeglasses sell for $20 a pair;

our addressable market is therefore $14 billion.

Market Sizing Methods

• Bottom Up Approach

– Sizes a market using projections of individual clusters.

– First, identify the customer segments it intends to reach, and then make estimates of their size and growth.

Our retail location at Dongsnhuan in Beijing gets 2500 passersby each weekday. Average conversion rates for retail opticians are

0.8%, so we project selling 20 pairs of glasses a day. We can open 20 locations in a year, so by year's end our annual revenue run

rate will be $1.7 million.

Top Down

Approach

Top-down approach

Starts with an estimate of the overall

market and then evaluates the (limited) successive proportions

that it intends to reach.

Universe

Filter A

Filter N

Estimation of Total Addressable Market

Government plans to distribute social

payments to rural farmers through mobile

phones

• Universe = any adult in a rural area

– 20 million adults.

• Out of these, 20% are farmers.

• Payment only works for people with mobile phones, this equates to 70%

• 40% of these, qualify based on crop revenues.

20,000,000 adults * 20% farmers * 70% (mobile ) * 40% (qualify)

Market Potential 1,120,000

How many pairs of boxers are

sold in the UK each year?

36

0-10yrs old 7.5 potential buyers

No boxers users

10-20yrs old 3.25 mn potential buyers

75% wear boxers 3 million users

3 pairs/year

20-40yrs old 6.5 mn potential buyers

50% wear boxers 3.2 million users

4 pairs/year

40-80yrs old 13 mn potential buyers

50% wear boxers 6.5 million users

3 pairs/year

boxers million user

yrpairsusers mn

user

yrpairsusers mn men to soldboxers 41

/42.3

/35.9#

Bottom up

approach

Bottom Up Approach

The problem with a top down approach

• Includes different customer segments

• Ignores variables such as operational constraints

The bottom up forecast is more robust and both should be included when evaluating the size of your market.

Methodology

1. Our product/service will save (audience) a lot of money. – We estimate $X per year based on current spending for this

product/service.

2. An average customer will spend $X per year with us because they spend three times that now.

3. Using (example) sales as a proxy (such as copier sales) we think that our average sales rep can make 10 cold calls per day and develop 3 solid leads per week. – Of those, the rep can close 2 per month.

4. At a 2 per month closing rate per rep, that's $Z on an annual basis. – Here's a table of the cash flow based on this: (TABLE)

Methodology

5. Using our experience in (market) as an analog, we estimate that customers will stay with our product for 3.5 years.

6. If we time these cash flows correctly, we can hire 5 new reps per month. – Assuming 90 days to train them and a maximum of 15

reps, here's a table of what we will look like at a full up run rate.

7. Notice that at about 36 months our hit rate drops off and our development $ go back up. – By this time we anticipate competitive pressure and we

will use leads acquired per day and time from conversions to sales as an early warning metric.

Key Points

1. Make sure to ask the right question to size the market as accurately as possible

2. Estimates are only as good as the quality of the information

3. Willingness to purchase and competitor moves are highly subjective

4. Offer ranges rather than point estimates.

BOTTOM UP EXAMPLES

Example 1

• A typical customer will pay us $1,000/year

• We’ll hire five sales reps – Each rep will sell 10 per month

• We’ll lose a certain percentage of customers per year

• We’ll up-sell a certain percentage of customers

• With this math we’ll add approximately $600,000 in annual recurring revenue per year assuming customer dropoff and up-sell equal out

www.businessmodelgeneration.com

Cost structure Revenue streams

Key resources

Key

activities

Key

partners

Value

proposition

Costumer

relationships

Costumer

segments

Channels

Print

Photostrips

on-site

Sponsors for

booth

Electronics

Manufacturers

Printer Supply

Companies

Live-

Stream

Photos

Booth

Electronics

Simple

Enclosure

Custom

SW

Makes

events

more fun

Branded

Memories

Follow

Events

Live

Deep

Brand

Interaction

Social Media

Direct

Marketing

Wedding

Sites

Word of

Mouth

Production

Companies

& Agencies

Transport by

Sales People

Events

Venues

Production

Companies &

Ad agencies

10% to close

the deal

10% to

execute the

deal Fixed Printer

Supply Cost Rental

Up-Sell

Booth Sale

Startup Metrics - StudioSnaps Adquisición - Reuniones

2 (67%) ; 1 (20%) ; .5 (10%)

Activación – Booking 1 (50%) ; 1 (100%) ; 1 (100%)

Retención (TBD)

Ingresos (100%)

Referidos 2 (200%) ; 1 (100%)

; 1 (100%)

Friend Network->Email Introduction: (3/mo.) ; Cold call (5/mo.) ; Cold E-mail (5/mo.)

13 total

Bookings obtained from meetings

Time will tell

Everyone pays & ½ up front

Referral Business

5.5 bookings / mo. 70% Simple Rentals – 450.000

30% Full Activation – 1.700.000

(.70*5.5* 450.000+.30*5.5* 1.700.000)*12 = 54.450.000 CLP/yr

www.studiosnaps.com

GROUP WORK A ensuciarse las manos

LA TAREA!

• HOY

– Presentaciones de la clase

– Trabajo grupal: Calcular tamano del mercado buttom up y top down.