#7 Let's talk finance!

Hi everyone,

in this post we will share our financial plan with you. Sounds exciting, right? :)

Let's start with our Full Life-Cycle Use Case (FLCUC)! As you can see from our infographics, online marketing and online sales are the key points in our strategy. The reason behind this is that the use of online channels allows us to explain the functionalities of the Backjag to customers - which would be difficult to do in a physical store - while at the same time reducing the need to bear fixed costs. In the present absence of capital, we are forced to use bootstrapping methods as much as possible. Although we have never built a webshop and don't even have experience in e-commerce yet, after 4+ years spent in the university we know that we can learn literally anything. Especially if there are a plenty of online courses and other learning materials out there.. (thank you Internet, our best friend!!) :) 

Revenue model

Our revenue model is based on a single revenue stream coming from the online sales of the our product, through our integrated webshop and Facebook e-shop on our Facebook page. We are planning to sell a single version of the Backjag, available in different colours. We are following a focused differentiation strategy: we want to differentiate from traditional raincoats both on a qualitative and on a functional basis. Qualitatively, we offer better materials and a stylish design, which is often abandoned in favour of pure funcionality. Functionally, we offer the possibility of folding the jacket into a bag, which is something unique in the market.

Since our product is quite unique on the market with a complex value proposition of a fashionable, wind resistant and waterproof jacket with the possibility to transform it into a fashionable and comfortable bag which allows people to avoid the hassles related to carrying a waterproof jacket or an umbrella around, it has been impossible for us to simply benchmark our price against competitors. It is also extremely difficult to numerically assess the value added by the possibility to transform a waterproof jacket into a bag, because:

1. no competitors are offering the same functionalities combined together
2. waterproof jackets are normally not targeted at travelers only
3. potential customers are not used to evaluate these additional possibilities and characteristics. 

As a result, our fixed pricing strategy is mainly grounded on our market research and customer surveys, which lead to the following results:

1. Half of the people surveyed paid more than 50€ for their current waterproof jacket (with a total average of 63€)
2. The average willingness to pay for Backjag of our potential customers was:

• ≅ 54€, for people who said they would be interested in buying our final product with full functionalities
• ≅ 50€ for people who said they might be interested in buying the final product.

Taking into consideration that:

• we decided to follow a value-based pricing strategy based on the value delivered to customers instead of production costs;
• 25% of people interested in the Backjag is willing to pay more than 65€ (if we deliver the promised features);
• although the poor design of the prototype has driven down customers' declared propensity to pay, we assume that with a well-designed end product we can expect a higher willingness-to-pay than declared; 
• in lack of a well-established, powerful brand - which is a must-have in the fashion industry - we cannot charge a large premium price for Backjag (at least not yet);
• it is quite clear that design is the key component in the pricing of a fashion product, but we do not have our final product design yet;

we initially estimated our final price to be around 55€. However, given the higher willingness to pay of potential customers, we are considering to increase the price up to 70-75€, depending on the quality of the materials we use and on the final design.

For the reasons stated above, we can't sit back and relax, as we still have to run a couple of tests in order to understand the actual WTP of customers and to verify our main assumption about the viability of the venture. 

Here is our current (simple) revenue structure:

Costs

Production costs constitute the major part of our cost structure. To be more specific, we have divided our production costs (cost of goods sold) in two parts:

• Costs related to the sourcing of fabric 
• Costs related to manufacturing/processing the sourced fabric.

Below is our main cost structure:

                                

1. Sourcing of fabric

Alibaba is one of the most prominent websites for sourcing raw material, therefore we used its listings to calculate our costs of sourcing fabric. Our goal was to find relatively high quality fabric (PVC coated water repellent material) which has a water resistance rate of approximately 15,000mm (=withstands medium to heavy showers) but also relatively affordable cost. 

Our calculation was based on batches of 1000 units (the minimum required for shipping), which is equivalent to 2000 square meters in total per fabric type.

• Inner polyester mesh fabric: 3 €/square meter ----Total 6,000 €/batch
• Outer polyester PVC fabric: 1.21 €/square meter ----Total 3,388 €/batch

The shipping cost was based on Alibaba's smart shipping cost calculator where we chose based on CIF shipping. Interestingly, we found that the volume of the products shipped affects final costs more than their weight. 

• Shipping of both fabrics: 499 €/400kg + 287 €/420kg-----Total 786 Euros/batch

2. Manufacturing/processing the fabric

Next, we had to estimate the costs for actually manufacturing the Backjag out of the sourced fabrics. This part was particularly hard since we had to collect information which manufacturers are quite reluctant to provide unless we actually sign a contract with them. However, we reached out to several manufacturers within and outside of The Netherlands and got a raw cost of 25~35 €. The reason why such a range exists is mainly due to two factors:

• location of manufacturers;
• number of activities performed by manufacturers. For instance, some of them provide integrated sourcing of materials, production and shipping of products.

We believe that in the beginning (and for small batches) choosing a multi-function manufacturer which can integrate sourcing, production and shipping of goods would be the best choice for us, as it would be able to obtain bulk discounts on materials and shipping which we would not be able to get and reduce the overall complexity of our supply chain. We are in touch with a designer willing to take care of the manufacturing side of our business, but we still have to evaluate his possible contribution in the project.

There are also other costs relevant to our product such as marketing expenses and fees for establishing an online shop.

For marketing expenses, Google Adwords or other search related advertisements did not fit our budget. since the cheapest advertisement would set us back with more than 1000€ per campaign. Additionally, Facebook advertising appears to be more suitable for our fashion product, so we decided to focus on Facebook advertisements. We chose Cost per Action (intended as Cost per Purchase) as our Key Performance Indicator (KPI) and found out that the average of the apparel industry was 10€ per action. In order to assume a conservative estimate - since we do not perfectly know our customers yet and the cost of advertising on Facebook strongly depends on the relevance of the ads for customers - we decided to increase the average rate by 50%, obtaining 15€ per action (expected to decrease in time due to learning effects). Assuming 50% organic sales and 50% paid click sales, we obtain a cost of customer aquisition of around 7.50€. 

Regarding the cost for delivering the final products to customers, we are considering to charge the customers themselves, in order to reduce complexity and take into account the possible different destinations of orders and related expenses.

Finally, regarding the costs of running an online shop, Shopify provides a cheap solution by charging 29 €/month for a basic online shop where we can sell our jacket on. Through such online-solution system, we don't need to worry about server maintenance costs or other fees needed to set up a payment system.

Oh yeah, and one thing we haven't yet decided on but we will discuss soon is the salary expense of the founding team members. Currently, we are thinking of running this business as a side-job for at least one year. During this one year, we have agreed upon taking 150€ to 200€/month. This totals to approximately 1000€ per month as general and administrative expenses (salary) in the income statement. Then, depending on the business direction after the first year, we may increase the salary to 1000~1500€/month if we decide to work on this business full-time and increase production volume.

So much information right?

Until now, we have talked about revenues and costs. With these data, we have come up with 3 different scenarios.

Too much information can be mind boggling, so we will just show you the key differences of the 3 scenarios :)

Our main variable that determines such scenarios is the production cost, which is still an assumption for us. As we have told you above, production cost will vary depending on the batch size, location, the level of autonomy given to the manufacturers, design capabilities of the manufacturer, consulting fees and much more. Therefore:

• the first scenario is based on a total production cost of 35€ (manufacturing costs) + 9€ (material costs);
• the second scenario is based on a total production cost of 25€ (manufacturing costs) + 7€ (material costs);
• the third scenario is based on a total production cost of 25€ (both manufacturing and material costs combined, with a single vendor).

Phew! that's about it for the financial analysis. I hope you enjoyed (?) our breakdown of the key criterion of revenues and costs.