Over the last 30 years, I have found it useful to constantly and obsessively run the numbers when I look at any business opportunity. I try to do this in a way that quickly strikes to the heart of any business. Running the numbers can identify key transformative opportunities as well as the greatest likely stumbling blocks to success. Just about every entrepreneur I know can generate the financial projections required by a standard business plan.
But the ability to carry out rapid and sequential back-of-the envelope estimates of things like where the sweet spot in the market lies, the down-to-earth costs of production, distribution and marketing, and the potential value of waste streams can be much more challenging—but much more likely to contribute to bottom-line profits.
Running the numbers regularly from the beginning, and changing quickly as new information comes in, is the most important contributor to profitability. Tweet This Quote
If you’re selling sanitary napkins to women who earn less than $2 per day, what price are they willing to pay? What are the essential features that satisfy the customers’ needs? Are you producing waste streams that could be put to profitable use? If your current price point is too high, what are the key contributors to cost and how can they be modified?
Each year that I have served as a mentor for entrepreneurs at Unreasonable, I’ve scheduled one-hour interviews with anybody who wants to talk to me. The rules are that there are no rules. They are free to ask me whatever they want, and I am free to tell them whatever I think; we keep an open discussion going from there.
One year, running the numbers emerged as the most important part of our conversations. A key reoccurring issue was how to achieve scale. I believe that earning a decent profit is the most important determinant of scale. Running the numbers regularly from the very beginning, and changing quickly as new information comes in, is the most important contributor to profitability. Following are some examples from my time at the Unreasonable Institute.
Increasing profits with new products
Sixty percent of mangos grown in Nigeria have no market and simply rot in the fields. At the same time, poultry farmers are struggling with the high prices of chicken feed. So Kelvin Ogholi and Blessing Mene have started UNFIRE, a business that makes highly nutritional chicken feed from the mango pits they extract from a portion of the 60 percent of mangos that are thrown away. Running the numbers revealed that UNFIRE sells chicken feed for 30 cents a kilo, but the juice that could be made from the pulp they throw away could sell for $3 a kilo. So why not sell mango juice in addition to chicken feed?
Earning a decent profit is the most important determinant of scale. Tweet This Quote
Kelvin and Blessing said the machines that produce mango juice in existing plants are too big and expensive. But when I asked if simpler mango juicers were available, they said a $50 household model was widely used. They would have to run it for five or six hours to learn how much juice it produced—with the price of mango juice, maybe they could even run four or five family size juicing machines at the same time. If they could dramatically increase their bottom-line profits by adding juice to their product line, they could probably sell a lot more chicken feed. (Watch a clip from our lively discussion.)
Getting creative with product options
Rachel and Jeff Starkey founded Transformation Textiles in Egypt. This company manufactures and distributes low-cost underwear and reusable feminine hygiene inserts, recycled from fabric waste, to girls in Africa. Rachel and Jeff have created an aspirational brand that is attractive, durable and could sell millions at the right price. Their current product, the Dignity Kit, sells for $6.75 to NGOs sponsoring girls in schools. It includes two pairs of panties, two leak-proof liners, six reusable pads, a bucket, soap, an informational booklet and a drawstring bag. Transformation Textiles aims to serve the market directly with a $3 product that includes the panty, a leak-proof liner and two reusable pads, which would last for three years. They intend to have another option for $1.50, which would not include the reusable pads.
Running the numbers is one of the most important components of a successful entrepreneur’s tool kit. Tweet This Quote
But in speaking with customers living on $2 per day or less, I have discovered that women and girls cannot afford a product at this price, even with the promise of long-term benefits. By simplifying the design of an inclusive starter product to a liner, 3 reusable pads and a colorful cloth belt, they could lower the cost to less than $1.20 and still deliver an attractive, functional product. Another option would be to use agricultural waste like banana fiber to create a biodegradable and disposable napkin insert for $.08 each. These entry-level product options could more readily meet the price point that is affordable to millions of customers and expand the existing Transformation Textiles product line.
Reducing a product’s cost to scale
Greenlink is a company that provides an off-grid structure for schooling and includes a furnished 40-foot container with a 1,500-watt solar energy system, technology and software system to teach students English. The model costs $40,000 and operates on a lease basis. We calculated that an average school has 400 students. At $3 per student per year, that leads to a 12-year payout plan—not an economically attractive option. In my experience, a competitive leasing business needs to have something like a three to four year payout to cover costs of things like bad debt. If you want to reach scale, you have to optimize the economic value and negotiate the pricing at every stage of your product. (Watch an excerpt from our discussion.)
Running the numbers habitually and effectively uncovers vibrant new market opportunities. Tweet This Quote
Some options we discussed to reduce the overall product cost for Greenlink (along with raising the lease rate) include:
- 50 percent ($20,000) of the total cost is in the container alone. I would set a target of lowering the cost to $10,000 using local materials and ‘out-of-the-box’ thinking. For example, is a local type of polyurethane a possibility?
- Customized containers from the West are comparatively expensive, but rehabbing a used shipping container and transforming it in–country could also significantly lower the price.
- 30 percent ($12,000) of the total system cost is in the photovoltaic (PV) equipment. Recently, there have been a number of initiatives underway to significantly lower the cost of traditional PV systems. One such example is SunTrolley, a portable solar, high-flow PV water pumping system currently being tested in India to replace millions of diesel pumps.I think it might be useful to apply some of the systems design approach used to lower the cost of conventional PVs to the design of Greenlink’s model.
Running the numbers is one of the most important components of a successful entrepreneur’s tool kit, but it requires striking to the heart of the economic processes that form a business from the very beginning. A back-of-the envelope calculation at the start of each business is extremely useful, but the numbers always change rapidly as learning takes place. Running the numbers habitually and effectively sharpens the price point at which the product or service is delivered, optimizes the most cost-effective use of staff time, and usually uncovers vibrant new market opportunities.
A version of this post originally published in August 2014. It has been updated and republished to inspire further conversation.