Business Plan Basics

Whether inventing and manufacturing proprietary products, distributing consumer products or using the internet to sell, find helpful discussions below.

Demographics Infrastructure Business Models

Egyptian vegetable vendor
Vegetable merchant

Business Models

Any type of business develops a product and generates revenue from customers who buy it. How a company designs and "packages" the product must mirror what satisfies the "needs" and "wants" of the target customer. Here are some examples of different business models and specific characteristics to consider.


Modern Marketing

Few periods in time have experienced such a wide variety of changes in sales and marketing as we have seen since the advent of the internet and other technologies. Although Americans have grown accustomed to commercial television with 10-20 minutes of program content followed by 5 - 10 minutes of commercial advertising, technologies like Tivo® and DVR allow customers to record programs and skip advertisements. Classified ads in newspapers, print advertising in magazines, even commercials on television now compete with e-mail marketing, pop-up ads and banner ads. Although few people complain about advertising in magazines, consumers often express distain for advertisements that "pop up" on a computer screen unexpectedly when someone visits a website.® was a pioneer in on-line advertising by selecting products for visitors based on their past experience and the purchases of other customers with similar profiles. Anyone who registers with a website today can expect that company to track and record every page they read, every button they click and every product they purchase.

Although AOL® was probably the first successful social networking site, others such as MySpace®, Facebook® and You-tube® are growing fast and gathering vast amounts of data from their members. Using the accumulated data, or data-mining, enables them to sell targeted advertising space on their webpages. No technology in the past has had the capacity to define precise groups of potential customers to track and predict their future behavior. What form of advertising and promotion is appropriate for your target market?

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When we think of manufacturing, we usually refer to the production of tangible goods like automobiles, electronics, even packaged foods. Besides the cost of the physical components or natural resources that make up the product, the cost of labor, the expertise of the labor force, shipping costs from the source of the raw materials to the manufacturing facility, and the cost of packaging contribute directly to the cost of goods. What about coordination of the manufacturing process? Will the process include "just in time" manufacturing? Will the product require temperature-controlled or dust-free production facilities? How stable and reliable are the sources of supplies and components?

Consider offshore production. Many U.S. companies take advantage of favorable import / export regulations mandated by NAFTA which allows for duty-free exportation of parts from the U.S. to Mexico for assembly and reimportation into the U.S. Mexican companies called "maquiladoras" have been assembling high tech electronics for more than 40 years. But lower labor costs in developing countries make the proposition of overseas manufacturing viable in the garment industry and toy industry as well.

There are obvious risks to consider when manufacturing overseas such as currency fluctuations, the stability and cooperation of local governments, labor unrest and the educational level of workers, and translation of training materials for workers all contribute to the feasibility of overseas manufacturing. Despite the risks, look at any personal computer to find memory chips made in Taiwan, LCD components made in Japan and all assembled in Mexico to demonstrate how often companies use overseas manufacturing. What is the right model for your business?

KFC restaurant at Great Wall of China
KFC at the Great Wall

Service Industry

Fast food, help desks, insurance and banking are common businesses we refer to as "service" companies because the delivery of the service differentiates the product of one company from another more than the tangible asset itself but even service businesses must make significant investments to sell products overseas. McDonalds® built roads in the USSR to reduce travel time from farms to processing plants in order to reduce spoilage of fresh produce. Businesses in many developing countries that rely on a consistent supply of electricity often invest large sums in electrical generators to maintain power levels for indefinitely long periods of time in the event of blackouts.

Financial service companies all distribute, collect and safeguard monetary assets but as we have learned from the current economic "crisis", how they "package" the product determines the risk and therefore the cost. What is the value of risk? If no one valued risk, the insurance industry would not exist; if customers did not recognize any differences in risk between individual mortgages, there would be no mortgage-backed securities to mitigate the potential risk of any single default or foreclosure. But some countries have weak insurance industries because the culture promotes individual savings and investment at a higher rate than in the U.S. Individuals accept the personal risks and often believe a higher power will control the outcome no matter what they do.

Why is "fast" food popular in the U.S.? It is no coincidence that the fast food industry developed in the U.S. Americans place a high value on time that many cultures do not understand. If there is no concept of "wasted" time, why promote a product that "saves" time. These are just a few considerations your business must address.


Sources of Revenue and Pricing

Karl Marx challenged the concept that the owners of the means of production deserved as much of a return on their investment as the workers did for their labor. Communism determined the value of goods primarily based on the cost of labor and materials. We would argue that the collapse of the Soviet Bloc proved communism was not a viable economic system. Capitalism generally asserts that the value of a product is any amount a buyer is willing to pay and a seller is willing to sell. So if capital is required to buy plants and equipment, the cost of that capital should be determined by the highest bidder. Interest rates are the simplest manifestation of this concept but what if the government forbids you to charge interest? Countries that embrace Muslim culture generally prohibit anyone from charging interest on loans, but they have adapted by permitting banks and financial institutions to charge fees.

What is the cost of an idea? How does the image of one mouse differ in value from the image of Mickey Mouse®? In modern economics, the concept of "intellectual property" includes assets like copyrights, trademarks, source code, artwork, music and many other less tangible products. Just as manufactured goods, companies will sell intangible assets for the highest price a buyer is willing to spend. Consulting fees, attorneys fees, royalties and designs should also be considered when a company selects products for sale. Services and ideas sold for the exclusive use of one buyer will probably carry a higher price than the price charged for many buyers to use the same product multiple times. For pricing intellectual property, buyers and sellers frequently evaluate the cost of competitive products, the potential cost savings for new techniques and the familiarity of a brand name. What unique characteristic does your product have?


Sales and Distribution Channels

Besides the expertise required to produce a product, all companies must employ someone or develop some means to transact a sale in exchange for the product. Automobile manufacturers use authorized dealers located near prospective buyers to sell their product. reaches buyers through the internet and engages third parties like the postal service, FedEx or UPS to pick up and deliver a product to the buyer. Auction houses arrange gatherings of interested parties to bid in person on sale items and the price of an object depends greatly on the success of the auction house to attract buyers with large budgets.

Many industries use intermediaries and sometimes many levels of intermediaries to sell their product. The Japanese publishing industry is famous for the many levels of wholesalers, distributors and subdistributors who handle sales before a book reaches a retail bookstore. Other companies hire sales representatives to visit clients and sell products in person. At each level of the sales process, an intermediary must be paid for their expertise in selling the product. The lower the cost of goods and the higher the retail value of a product, the more margin a company has available to spend on the sales process.

Finally, the sales process often involves pricing negotiations. It is very common for companies to offer discounts to move higher quantities of goods or provide other incentives for customers to buy sooner rather than later. Whether such reductions in price are built into automated pricing models on the internet or whether individual sales representatives have the authority to make pricing concessions, companies must be very careful that the company may lose money on the final negotiated price. Repeatedly selling most products below cost is a formula for disaster but selective discounting below cost, ie promoting "loss leaders" can be an effective technique to attract customers.


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