CO.STARTERS Week 4: Building The Model to Scale
Starting Small, Distribution, Revenue, & Pricing
Last week we talked about creating a great relationship with your customer. But, this week, we developed the internal processes needed to keep our business running — distribution, revenue collection, and pricing.
To open up our session we were visited by CO.STARTER alumna, and founder of Love Always Floral, Christy Tehven. Her journey demonstrated how important it is to grow incrementally and remain flexible along the way.
Originally, Christy was going to create a floral design company and an events production company all in one. As she progressed, however, she realized that it was the design side of floral arrangements that really excited her, so she simplified her approach.
Like Christy, a few of our current cohort members have pared down their original business ideas, or even worked backwards from their big goals to realize their vision in stages. For example, a retail concept could get its start at farmers’ markets or special events; a web application could be a wire-frame prototype tested thoroughly before hiring a team of developers; or a service-based business could work seasonally or within limited hours to evaluate demand.
Questions to Ask Yourself While Dreaming Big & Starting Small
- What is essential to solving my customer’s problem?
- How can I start small?
- What is the quickest way to scale? Are there any consequences of starting this way?
- How many potential customers are out there?
- How many can I actually reach?
- Who do I know that is willing to try new things even if they aren’t perfect yet and can represent the type of customer I am trying to reach?
Starting small allows you to serve your customer NOW, not someday, and makes the customer an important part of the startup process.
Distributing Your Product or Service to Your Customer
After we’ve identified our customer, and we’ve worked out how we communicate how our product/service provides them value, we need to figure out how we’ll deliver that value. This portion of the evening focused on Distribution.
Typically, there are two ways of distributing your product/service to your customer: directly or through someone else.
If you’re solely responsible for getting your product/service to your customer, then this is a direct sale; it can be accomplished through a storefront, online, or in person.
- Pros of this approach: You can usually make more money per sale.
- Downside of this approach: You may reach fewer customers.
It may help to think of indirect sales as using a “middleman” to deliver the value you’ve created to your customers. This might look like you selling through someone else’s store, an online marketplace like Amazon, or to a distributor.
- Pros of this approach: You can reach a greater number of customers. And, typically, a middleman takes care of logistical aspects of the transaction (billing, shipping, etc.)
- Cons of this approach: You’ll likely make less money per sale. After all, the middleman needs their cut of the profits to make it worth their time and effort.
Keep the Customer in Mind
When determining which approach your business will employ, always consider what’s best for your customer. Keep them at the center of your decisions. Ultimately, the way you choose to sell your product or service needs to make sense for them.
Once you’ve created a valuable product/service, and determined that customers are willing to pay for it, you must consider how to receive those payments. Here are some examples of popular revenue stream models:
- Direct or Indirect Sale: You get money, the customer gets the goods or services.
- Subscription: Customer pays for continuous use of your service. (Netflix, gym)
- Usage Fee: Customer pays for how much your product/service is used. (cell phones that charge by the minute)
- Renting/Leasing: Customer pays you for temporary use of your good. (apartment rentals, car leases)
- Brokerage/Referral Fee: Customer pays a small fee for your helping them find what they need. (real estate broker or dating site)
- Advertising Fee: Receive payment by allowing advertising to reach customers through you. (Google or magazines)
- Licensing: Customer pays for permission to use your good or service, but ownership is not transferred. (Microsoft Office)
As Christy was building out Love Always Floral she knew that her arrangements were going to fetch a higher price than existing floral shops as a result of her attention to customer preferences. Yet, she admitted that setting those higher prices was nerve-wracking. Too high and you may price yourself out of relevance, too low and you remove yourself from your target customer base.
How do we set our price?
To answer this question we turn to the person who matters most: our customer. If we’ve successfully identified the benefit that our product/service brings to them, then we know that what we offer provides value. Now we just ask a few questions:
- What is the benefit I offer worth to my customer?
- How do I know?
- What is my customer willing to pay for that benefit?
Of course, we’ll also want to compare our pricing with our competition. Ask, “How much does the customer currently pay our competition?” Use this as a baseline for determining your own pricing, but by no means is this an apples-to-apples situation. You customer, in the end, is your best gauge for pricing. Let them inform your pricing decisions.
NEXT WEEK’S FOCUS — Strengthening Your Structure
During Week 5, we will cover:
- Business Structures
- Intellectual Property
We will also welcome a very special guest speaker to inform us of all legal matters to consider when starting our businesses. Miguel Danielson is Founder and Managing Member of Danielson Legal LLC. He has advised hundreds of technology and IP-focused clients on trademark portfolio protection and strategy, copyright issues, licensing and technology transactions, due diligence and corporate IP matters, domain name and Internet issues, and related matters.
INTERESTED IN BRINGING YOUR IDEA TO LIFE?
Though our Winter Cohort is off and running, we are accepting applicants for our Spring and Summer Cohorts on a rolling basis. Apply here.