BUZZ MARKETING EXAMPLE

BUSINESS PLAN OUTLINE

Note: The mission of this proposed start-up organization is to utilize Suffolk University students as “buzz marketers” for local businesses. For a Business Week article about buzz marketing, go to http://www.businessweek.com/magazine/content/01_31/b3743001.htm.

Balanced Scorecard

The business model of Spokesguy is to collect subscription revenues from corporate advertisers for managing student spokespersons on a continuing basis and at special events. Our spokesguy employees are a culturally and ethnically diverse group who are well trained (by nature of their college experience) to understand and executive marketing strategies. We will establish a “command center” in downtown Boston to directly intervene when our employees need our assistance. We will focus on corporations with a large Boston presence who are selling products to young adults. By leveraging existing resources, we hope to become profitable within the year.

The bottom line: Young, diverse, intelligent (and inexpensive!) spokesguys with a genuine “downtown Boston” presence.

Regression

We described our business model to ten local business managers in downtown Boston and Beacon Hill and then asked them, on a scale of 1 to 10: (X1) should a spokesperson for a local business actually live in Boston?, (X2) should a local college based spokesperson company charge significantly lower rates than an ad agency?, (X3) should a young spokesperson be closely supervised?, and (Y) how attractive would businesses like yours find our service?

If, after confirming R-Square and the F statistic, we find that X2 is highly significant, X3 is modestly significant, and X1 is insignificant, we might therefore decide to emphasize cost and control, thereby going “downmarket.”

The bottom line: We can maintain low prices by keeping costs down, remaining local, and avoiding competition.

Flexible Budget

We are charging $1,000 per day for active attendance at special events and $2,000 per month for passive modeling of clothing and merchandise. We are spending $4,000 per month for a small business office, a telephone system, and marketing materials. And we will pay students $1,000 per month, i.e. “half the subscription revenue.”

Our private investors have authorized us to spend (or lose) up to $10,000, which would provide us with several months of activity in the low volume scenario. The moderate volume scenario is insufficient to justify the effort, but even if the high volume scenario fails to materialize, we can liquidate the entity and recognize a small gain if we can achieve the moderate volume scenario.

The bottom line: We can earn close to $50k annually by managing 4 spokesguys, an easily achievable target.

Process Flow

We will sign students to contracts with an advance of half the first month's compensation prior to signing contracts with customers, thus designating the student contracts as direct materials. The students are the direct laborers, with work-in-process beginning on the first day of the month and ending on the final day of the month. Finished goods are “completed” at the end of the final day of the month, and “sold” shortly thereafter when the customer acknowledges that services have been adequate.

In a typical month, we will begin with four “direct material” contracts and end with four “finished goods” and four “goods sold.” We will need four cell phones (i.e. overhead) to give to the students, and four half-days of supervisory time each week (i.e. indirect labor) to oversee students, which can be easily financed out of the monthly fixed cost budget.

The bottom line: We must maintain a set of student contracts at the front end, and convert monthly contracts to fast cash at the back end.

Customer Demand

We plan to raise brand awareness for our product by asking students to walk around downtown Boston and Beacon Hill with inexpensive T-Shirts that say “your ad here!” After saturating our local market with this inexpensive marketing technique, we plan to reinforce our brand message by staging “guerrilla marketing” performances with drama majors.

With $200 in donated T-shirts and $400 in performance funding, we expect to generate 4 to 8 customers from the awareness marketing campaign and another 4 to 8 customers from the reinforcement marketing campaign. We can reduce or eliminate the second campaign if the first campaign falls short of expectations, but may “pull the plug” on the entire initiative if the first campaign generates no leads.

The bottom line: Local, inexpensive viral marketing activities may generate up to four times the volume we need to earn $50k annually.

Total Quality Management

We can theoretically generate as many as 16 customers from our marketing activities; however, we have only planned to serve as many as 10 customers at a time. We believe that we will be able to extend our production capacity towards 16 by investing in prevention activities (i.e. an employee “trainer” at $1,000 per month), appraisal activities (i.e. a management assistant at $500 per month), and external failure activities (i.e. a “guaranteed satisfaction or your money back” policy). Although the cost of such activities would reduce our profits, it would not eliminate profits at volumes between 10 and 16.

The bottom line: If we must strain to serve more customers, we can afford to hire additional staff and offer satisfaction guarantees.

Job Order Costing

Because we plan to earn a profit by the end of our first year of operations, we will create a job order costing schedule for our first year. We will begin with $1,000 of direct materials inventory for two presigned students, but no work in progress or finished goods inventory. And we will end with $4,000 of direct materials inventory for four presigned students, no work in progress inventory, and four students (i.e. $4,000) in finished goods inventory.

Alternatively, we might need to presign more students to have them available at an earlier time, thereby increasing the burden of our direct materials inventory. Of course, we might be able to eliminate finished goods inventory by reducing or eliminating the possibility that our customers might take advantage of our “money back” guarantee.

The bottom line: The costs of maintaining student contracts at the front end are significant but not onerous.

Activity Based Costing

We are charging customers differential prices for monthly subscriptions and daily special events, thereby removing much of the pricing risk from our business model. It will probably be necessary, though, to place a “cap” (perhaps two special events per month) on our student appearances.

We are planning to staff our own “command center” and will be paying ourselves out of profits, thereby removing much of the cosk risk associated with activity based costing. However, we might wish to calculate the cost of “extremely difficult to manage students,” and if necessary we might wish to add a line to our cost structure that compensates ourselves for excessive activity.

The bottom line: We are prepared to cap our costly “special event” service and/or implement premium pricing policies if necessary.

Variance Analysis

Our “standard” direct materials budget calls for the payment of $500 to four students over the course of the year. However, if the students unexpectedly demand 75% of the first month's subscription revenue (i.e. $750), we might need to increase our average payment to $750 while hiring a total of four students. Although the direct materials quantity variance would be zero, we would be incurring a direct materials rate variance. Nevertheless, we believe that the additional cost would be controllable and affordable.

Furthermore, our “standard” direct labor budget calls for the payment of $1,000 to four students over the course of the year. If two of our four students unexpectedly quit and need to be replaced at the last moment by two new (and far more expensive) students, we might need to increase our rate while increasing our quantity from four to six. Nevertheless, we again believe that the additional cost would be controllable and affordable.

The bottom line: We understand that labor turnover and compensation is inherently unstable; these risks appear to be manageable.

Target Pricing Analysis

With a $3,000 unit price, $1,000 unit VC, and $4,000 FC, we break even at a volume of $4,000 / $2,000 = 2.0 units. However, our conservative target (monthly) profit for our first year is $4,000, which can be achieved with a volume of [ $4,000 + $4,000 ] / $2,000 = 4.0 units. We believe that 4.0 units is well within the range of achievability.

At 4.0 units, our operating leverage ratio is $8,000 CM / $4,000 NI = 2.0, meaning that a 150% increase in volume to 10 units would result in a 300% increase (i.e. quadrupling) of net income to $16,000. We believe that these numbers all appear reasonable and appropriate for a start-up operation, and thus our pricing strategy appears reasonable.

The bottom line: Our $50k annual profit at 4 units will quadruple when we increase our volume to 10 units, a moderately easy goal.

Competitor Analysis

We acknowledge that advertising agencies in the Boston region could conceivably compete for our business. However, given our “downmarket” emphasis and extremely low fixed cost structure, we believe that such competition is unlikely.

On the other hand, students at other universities in the Boston region could easily compete for our business as well. A Nash equilibrium analysis could be constructed in a manner that illustrates that a “hold prices firm while remaining in our home turf” strategy may yield mutually superior outcomes to a “slash prices while invading our opponent's home turf” strategy. In other words, we might be better off remaining in downtown Boston and Beacon Hill at our current price levels while ceding the remainder of the city to competitors at other universities, while remaining fully prepared to slash prices and invade other neighborhoods if challenged to do so ...

... all the while respecting laws of fair competition, of course ...

The bottom line: Our pricing power is strong if we remain local, and we are prepared to protect our “turf” from competitors.

Discount Pricing

If a single customer demands a discount, we might be willing to charge him (her) a price as low as $1,000.01 per month. However, we would only accept such a low price if that customer promised to refer to us (through word of mouth) two or three other customers who are willing to pay our full standard price.

If a competitor invades our home turf, we might be willing to slash average prices “across the board” to as little as $8,000 / 4 = $2,000 when 4 students are employed, and $14,000 / 10 = $1,400 when 10 students are employed. In fact, we might create discounting strategies that offer free attendance at special events in order to lock in subscription revenue, thereby reducing the average price level towards $2,000 or $1,400.

The bottom line: We can slash average monthly revenue per client by 33% to 50% and still survive; we are prepared to do so.

Cash Flow Analysis

With little inventory, no fixed asset investing payments, and no debt financing repayments, we project that operating cash flow and total cash flow will both be positive during our first year of operations. There is a possibility, though, that we may be faced with customers paying late, leading to an increase in accounts receivable that will cause a decline in cash balances.

Therefore, we will adhere to a strict 30 day collection policy that will terminate services after one month if outstanding invoices are not paid in full. Although such a policy might limit our ability to sell services to customers who are accustomed to longer terms, we believe that the danger of cash flow insolvency is so great that this restriction on growth is appropriate.

The bottom line: We are willing to “cut off” nonpaying customers very quickly to maintain cash flow solvency.

Ratio Analysis

Although we do not require start-up capital per se, our private investors have authorized us to spend (or lose) up to $10,000, and thus we consider $10,000 to be our initial investment. We believe that the minimal required return on investment for this relatively low risk venture is 15%, and the average expected return is 30%.

If we earn the $4,000 in profits predicted by our flexible budget, the residual income will be positive $2,500 and the economic value added will be positive $1,000. Thus, we believe that our investors will be delighted with the fiscal results that we will produce for them.

A Dupont ratio similarly projects very satisfactory returns on equity. We expect to earn relatively large amounts of revenue and net income on relatively small “bases” of total assets and equity, thereby producing an extremely healthy turnover ratio (i.e. revenue / total assets), and relatively healthy percentages for the equity multiplier (i.e. total assets / equity) and margin (i.e. net income / revenue).

The bottom line: With few assets and low costs, our ROE will be based on turnover and margins, and not on the asset / equity multiplier.

Revisiting the Balanced Scorecard

Although the balanced scorecard framework described at the beginning of this document appears to be valid, the high degree of profitability might lead us to conclude that the emphasis on “downmarket” low cost business may not be necessary. In fact, if we competitively focus on the downtown and Beacon Hill neighborhoods to avoid destructive competition, we might be able to sell our services to a more upscale market.

Nevertheless, we believe that a more upscale approach should only be attempted after we establish our business in Year 1 and earn a profit that can then be reinvested in expansion activities. In order to establish our business, we intend to track the following key performance indicators in the four balanced scorecard categories: (a) employee performance statistics that are collected through surveys of the individuals who encounter our “spokesguys” on the street, (b) “command center” oversight performance statistics that are collected through a “complaint report” process, (c) customer satisfaction performance statistics that are collected through customer feedback surveys, and (d) profit outcomes that are tracked through monthly and quarterly financial accounting reports that are prepared in accordance with GAAP.

The bottom line: We will rely on feedback surveys and focus on the local downscale market, but may go upscale in the future.