Let’s Test a New Model

Let’s Test a New Model

Module 4: Let’s Test a New Model

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🎯 Our goal in this module is to see if we can reach our target Net Profit (before taxes) figure by modifying your business model.

Let’s take a look at another option: selling directly from your “kitchen” to the people who will be consuming your energy bars.

We just need to make a few simple, quick changes in our Profit & Loss Sheet to create a snapshot of what this could look like.

In this new model, you will sell directly to final consumers of your energy bars.

  • You already have your place of business renovated for making and storing your bars.
  • Maybe you decide to add a window to the outside world where you can interact with your customers, as well as some signage near the window with your business name, logo, and menu.
  • No need for anyone to enter your facility (just in the early stages), so no need for more renovations or purchases of furnishings, etc.

Here are three Sales options to start with:

  1. Customers can order from your website and then pick up their orders at your "kitchen" facility.
  2. Or, they can just stop by your facility, ring a bell at your new window to get your attention, and then select and purchase bars face-to-face.
  3. Or, customers can order through DoorDash, or other food delivery services. In this case, customer orders will be picked up at your facility window by the delivery service.

Scenario 1: Sell 50,000 Energy Bars at $4 Each

For this business model, since you won’t be selling to Specialty Food Stores, but directly to the people who will be eating your bars, you can sell them at the market price, which, as we recall, is between $4 - $5 dollars per bar.

Let’s go with $4 per bar, to be conservative, and let's stick with our original Year 1 Sales target of $200,000.

$200,000 ÷ $4 per bar=50,000 bars\$200,000\ \div \ \$4\ \text{per bar}=50,000\ \text{bars}
We already determined that you could realistically produce this amount of energy bars in a year—so far, so good.

Let's add a row to the Sales section in our Profit & Loss Sheet and input this new figure:

Sales
Direct Sales
200,000
Specialty Food Store Sales
0
Total
$200,000

What about your Cost of Goods Sold?

(Click each triangle toggle to view)

Product Ingredients

At 50,000 bars, your Product Ingredients cost remains the same.

However, since you won't be selling to Specialty Food Stores, your Display Boxes cost disappears. But, you will probably need carry-out boxes and/or bags.

Carry-Out Boxes

Since your customer orders will vary from maybe one or two bars from casual walk-by traffic, to possibly a dozen or more from a DoorDash or website order, it’s hard to know how many or what sizes of boxes or bags you will need.

Walk-by traffic with smaller orders may not want or need a box at all while DoorDash and website orders may require different size carry out boxes or bags.

We’ll just make a rough estimate of this cost for now, and then adjust it later on, as you get more real experience after you’ve been in business for a few months.

Let’s “guess” that your average order size will be 4 energy bars.

50,000 bars ÷ 4 bars per order=12,500 orders50,000\ \text{bars}\ \div \ 4\ \text{bars per order}=12,500\ \text{orders}

From our research, let's say we estimate the average cost per carry-out box at $0.20. If each order requires one carry-out box, then we have:

12,500 boxes × $0.20 per box=$2,50012,500\ \text{boxes}\ \times \ \$0.20\ \text{per box}=\$2,500

Let's add another $200 for stick-on labels with your business name, logo, and contact information as well as $100 for an assortment of bags (in different sizes):

$2,500 + $200 +$100=$2,800\$2,500\ +\ \$200\ +\$100=\$2,800

(Total for Carry-Out Boxes)

Packaging

Your Packaging cost could be reduced for this new model, but there’s a larger discussion of the pros and cons surrounding that decision.

Let’s leave it as it is for this first scenario of your "Direct to Customer" business model and see where we are before going through a packaging analysis.

So, in summary, the only change to your Cost of Goods Sold for moving from a business model selling to Specialty Food Stores to a model selling directly to consumers will simply be replacing Display Boxes with Carry-Out Boxes/Bags.

Let’s update our Profit & Loss Sheet:

Sales
Direct Sales
200,000
Specialty Food Store Sales
0
Total Sales
$200,000
Cost of Goods Sold (COGS)
Product Ingredients
50,000
Packaging
12,500
Display Boxes
0
Carry-Out Boxes
2,800
Total COGS
$65,300

What about Your Operating Expenses?

Now, let's look at your Operating Expenses and consider what might be different with this new "Direct to Consumer" business model.

(Click each triangle toggle to view)

Advertising & Marketing → $24,000

First up, Advertising & Marketing.

Since you won't have Specialty Food Stores introducing their customers to your bars, you will need to find potential customers in other ways--social media marketing, YouTube videos, paid online advertising, email marketing, local and regional fitness clubs, farmers’ markets, etc.

We don't need to create a specific marketing strategy just yet, but for now let’s increase your Advertising and Marketing cost from $12,000 (in Scenario 1 of our Specialty Food Store model) to $24,000.

Credit Card Fees → $5,000

Since customers will be buying directly from you, we’ll need to add some credit card fees or other payment method fees. 

A more conservative estimate of 2.5% of Sales would probably be a reasonable place to start:

$200,000 Sales ×0.025=$5,000\$200,000\ \text{Sales}\ \times 0.025=\$5,000
Shipping Boxes → $0

In this new model, you're no longer handling deliveries or shipping—just pick-up only. 

So, we can get rid of our old Shipping Boxes cost.

Vehicle Operating Expense → $4,388

Since you won’t be delivering bars to customers, your Vehicle Operating Expense will decrease. 

For a rough estimate, let’s cut that expense in half:

$8,775 ÷ 2=$4,388\$8,775\ \div \ 2=\$4,388
Website & SEO Services → $10,000

Your website will likely take a much more significant role in your "Direct to Consumer" business model--this could entail premium web hosting, web design, better SEO, etc.

For now, let's double your Website & SEO Services cost:

$5,000 ×2=$10,000\$5,000\ \times 2=\$10,000

Finally, we'll keep Miscellaneous to 15% of your Operating Expenses subtotal (which will be automatically calculated in our spreadsheet).

We'll let your other Operating Expenses remain the same for this first scenario of your new "Direct to Consumer" model.

Let’s update our Profit & Loss Sheet:

Sales
Direct Sales
200,000
Specialty Food Store Sales
0
Total Sales
$200,000
Cost of Goods Sold (COGS)
Product Ingredients
50,000
Packaging
12,500
Display Boxes
0
Carry-Out Boxes
2,800
Total COGS
$65,300
Operating Costs
Advertising & Marketing
24,000
B&O Tax
0
Bank Charges
600
Credit Card Fees
5,000
Insurance - Health
6,000
Insurance - Hazard/Liability
3,000
Janitorial Expense
0
Legal & Professional Fees
5,000
Licenses & Permits
2,000
Office Expense
1,500
Payroll
0
Payroll Taxes (State & Federal)
0
Phone
600
Postage & Printing
0
Rent
12,000
Repairs/Maintenance
0
Security & Alarm Expense
3,500
Shipping Boxes
0
Utilities
4,000
Vehicle Operating Expense
4,388
Website & SEO Services
10,000
Miscellaneous (15%)
13,817
Total Operating Costs
$93,826
Net Profit (Before Taxes)
$40,874

Our previous "Specialty Food Store" business model with 50,000 bars selling for $2 each resulted in a Net Loss of $47,998 (before taxes).

This new model generates a Net Profit of $40,874 (before taxes).

👍
Wow! This new “Direct to Consumer” model is starting to look promising.

Let’s see what happens if you make and sell 100,000 energy bars with this “Direct to Consumer” business model.

Scenario 2: Sell 100,000 Energy Bars at $4 Each

We already determined that you can realistically produce 100,000 energy bars in the same facility and with the same equipment (recall Scenario 2 of the Specialty Food Store model).

If we keep the selling price at $4 per bar, then your new Sales estimate will be:

100,000 bars ×$4 per bar=$400,000 Sales100,000\ \text{bars}\ \times \$4\ \text{per bar}=\$400,000\ \text{Sales}

What about Cost of Goods Sold?

Since all we're doing in Scenario 2 is doubling the number of bars that you will be producing and selling, we just have to double our previous Cost of Goods Sold estimate:

(Click each triangle toggle to view)

Product Ingredients → $100,000

$50,000 (before) to $100,000 (now)

Packaging → $25,000

$12,500 (before) to $25,000 (now)

Display Box → $0

Still $0 (no change)

Carry-Out Boxes → $5,600

$2,800 (before) to $5,600 (now)

💡
By doubling the number of energy bars sold, your Gross Profit also doubles in this scenario to $269,400. You now have twice as much money left over to pay for your Operating Expenses.

What about Operating Expenses?

Now, let's think through how your Operating Expenses might be affected by doubling Sales.

(Click each triangle toggle to view)

Advertising & Marketing → $48,000

Advertising & Marketing will surely increase, so for now let's double it from $24,000 to $48,000.

Credit Card Fees → $10,000

Let’s update our Credit Card Fees estimate (still at 2.5% of Sales):

$400,000 Sales ×0.025=$10,000\$400,000\ \text{Sales}\ \times 0.025=\$10,000
Legal & Professional Fees → $7,500

With doubling sales to 100,000 energy bars, you will probably have more questions that need legal attention (e.g. taxes, employees, vendor agreements, problems with delivery services, etc.)

Consequently, we should allow for some increase in your Legal & Professional Fees—let's say 50% (from $5,000 to $7,500).

Office Expense → $3,000

Let's also double your Office Expense from $1,500 to $3,000.

Payroll → $31,200

With the increased number of energy bars being produced and sold, you may find that you need some more help in the kitchen and at the customer window.

To start out, let's say you decide to hire a couple of high school students to work part-time (around 20 hours a week for each student).

Let's say you pay them $15 per hour. Here's what that would cost for Payroll:

$15 per hour ×20 hours per week ×52 weeks per year=$15,600\$15\ \text{per hour}\ \times 20\ \text{hours per week}\ \times 52\ \text{weeks per year}=\$15,600

(Per year for each employee)

2 employees ×$15,600 per employee=$31,2002\ \text{employees}\ \times \$15,600\ \text{per employee}=\$31,200

(Total annual payroll)

Payroll Taxes (State & Federal) → $2,500

You will also need to pay Federal Employment Taxes (FICA) on the wages of your employees. Currently, this amount is just under 8% of their total pay.

Some States may also require employers to pay other taxes on the wages earned by employees, so be sure to check with your State to get this information (a simple Google search is a good place to start).

For our Payroll Taxes projections, we'll just use the 8% for Federal FICA taxes:

$31,200 payroll ×0.08=$2,496\$31,200\ \text{payroll}\ \times 0.08=\$2,496

Let’s be conservative with our estimate and round this up to $2,500.

Phone → $1,200

Your Phone costs are likely to increase with a doubling of Sales.

For a rough estimate, let's double this cost from $600 to $1,200.

Utilities → $8,000

Your Utilities are also likely to increase with a doubling of Sales.

For a rough estimate, let's double this cost from $4,000 to $8,000.

Vehicle Operating Expense → $8,775

Let's also double your Vehicle Operating Expense back to the original $8,775 (you may be driving around more to pick up additional ingredients or supplies).

Website & SEO Services → $15,000

Since you may be directing more traffic to your website and converting more sales online (even with your current in-person pick-up model), let's increase your Website & SEO Services cost by 50% (from $10,000 to $15,000).

Finally, your 15% Miscellaneous expense will automatically increase with your new Operating Expenses subtotal.

We'll let your other Operating Expenses remain the same for this scenario.

Now, let’s update our Profit & Loss Sheet with all of these new estimates:

Sales
Direct Sales
400,000
Specialty Food Store Sales
0
Total Sales
$400,000
Cost of Goods Sold (COGS)
Product Ingredients
100,000
Packaging
25,000
Display Boxes
0
Carry-Out Boxes
5,600
Total COGS
$130,600
Operating Costs
Advertising & Marketing
48,000
B&O Tax
0
Bank Charges
600
Credit Card Fees
10,000
Insurance - Health
6,000
Insurance - Hazard/Liability
3,000
Janitorial Expense
0
Legal & Professional Fees
7,500
Licenses & Permits
2,000
Office Expense
3,000
Payroll
31,200
Payroll Taxes (State & Federal)
2,500
Phone
1,200
Postage & Printing
0
Rent
12,000
Repairs/Maintenance
0
Security & Alarm Expense
3,500
Shipping Boxes
0
Utilities
8,000
Vehicle Operating Expense
8,775
Website & SEO Services
15,000
Miscellaneous (15%)
24,341
Total Operating Costs
$186,616
Net Profit (Before Taxes)
$82,784

Our previous scenario with the "Direct to Consumer" business model resulted in a Net Profit of $40,874 (before taxes).

This scaled up scenario, with double your Sales, generates an estimated Net Profit of $82,784 (before taxes).

👏
Another positive improvement of about $42,000! Now this "Direct to Consumer" model looks even more promising.

One Final Scenario

Let's test out one more scenario with the "Direct to Consumer" model to see if we can reach our target Net Profit (before taxes) of $100,000.

Let's raise the price of your energy bars from $4 to $5 per bar and see what happens.

This one should take about five seconds, since all we're changing is Sales from $400,000 to $500,000.

100,000 bars ×$5 per bar=$500,000100,000\ \text{bars}\ \times \$5\ \text{per bar}=\$500,000

Your Cost of Goods Sold and Operating Expenses remain the same as in Scenario 2 (with the exception of Credit Card Fees).

Since we're increasing Sales, Credit Card Fees will also increase.

If we continue to estimate (conservatively) this cost at 2.5% of Sales, then your new Credit Card Fees cost will be:

$500,000 ×0.025=$12,500\$500,000\ \times 0.025=\$12,500

Your 15% Miscellaneous expense will also automatically increase based on your new Operating Expenses subtotal.

Let’s update our Profit & Loss Sheet:

Sales
Direct Sales
500,000
Specialty Food Store Sales
0
Total Sales
$500,000
Cost of Goods Sold (COGS)
Product Ingredients
100,000
Packaging
25,000
Display Boxes
0
Carry-Out Boxes
5,600
Total COGS
$130,600
Operating Costs
Advertising & Marketing
48,000
B&O Tax
0
Bank Charges
600
Credit Card Fees
12,500
Insurance - Health
6,000
Insurance - Hazard/Liability
3,000
Janitorial Expense
0
Legal & Professional Fees
7,500
Licenses & Permits
2,000
Office Expense
3,000
Payroll
31,200
Payroll Taxes (State & Federal)
2,500
Phone
1,200
Postage & Printing
0
Rent
12,000
Repairs/Maintenance
0
Security & Alarm Expense
3,500
Shipping Boxes
0
Utilities
8,000
Vehicle Operating Expense
8,775
Website & SEO Services
15,000
Miscellaneous (15%)
24,716
Total Operating Costs
$189,491
Net Profit (Before Taxes)
$179,909
🔥
Wow! Raising the price of your energy bars by just $1 increases your Net Profit (before taxes) by nearly $100,000.

You can see how easy it is to make changes and instantly see how your Net Profit is affected--positively or negatively.

Comparing different scenarios on your Profit & Loss Sheet can often lead to the discovery of options that you had not seen or considered before.

As you go through this process with your business (whether you're just starting out or already up and running), it's important to think things through and to be as realistic as possible.

For example, let’s go back and take a closer look at Scenario 2, which resulted in $82,784 Net Profit (before taxes).

Start With Sales

Be honest with yourself. Do the math using a reasonable number of hours in a day and not more than 6 days a week.

Are you pretty sure that you can make, package, and store 100,000 energy bars in a year, plus the prep and clean-up work with just two part-time employees?

Remember that you will have to order ingredients, packaging, boxes, and bags.

You will also have to keep track of inventory and deal with potential quality control or equipment problems.

Will you have enough time or mental energy left to develop new recipes and keep a smile on your face and a song in your heart--especially when serving your customers?

What if you are not well for a few days or a week?

📍
During the "Honeymoon Period"—the first 6 months to a year of running your business—anything is possible, but your business model should be designed for the long term as well.

At some point, hiring additional help (especially in more technical areas of your business) will make sense. The main thing is to be honest with yourself.

Next Up, Cost of Goods Sold

You should double check these costs.

At some point, you will need to look into order and delivery times and estimate what quantity of ingredients, packaging, boxes, and bags you will need to have on hand—based on how long it takes from placing an order to receiving it at your facility—so that you don’t run out of anything critical to making and selling your energy bars.

On to Operating Costs

Think through each step of your operations--from turning the lights on at 4am in the morning to cleaning up at the end of your workday and locking the door behind you around midnight. 😉

Walking yourself through this process will reveal details that are often missed when you do your initial projections.

🔎
For example, when you explore the details of cleaning-up at the end of a workday, you may realize that you need an unusually deep sink and a high velocity hose with water heated to an above normal temperature.

This discovery will likely lead to an increase in your energy consumption (Utility costs) and may require the purchase of additional equipment (we'll talk about how to organize these costs in the sequel to this guide–not to worry).

They may also reduce your time available for actually producing bars.

Remember to double check other Operating Costs, such as:

  • Advertising & Marketing—If you increase your Sales projections, you may need to increase the money and/or time that you spend to acquire customers.
  • Credit Card Fees—If these are based on Sales, be sure to increase these estimates as you increase Sales.
  • Payroll—After you do a reality check on the time and effort required for the level of Sales that you are projecting, you may decide that you really will need some extra help.

Again, every prediction about the future will be a “guess”, but the more you can think through the details of your business model, the better your guesses will likely be, and the better the odds of building a successful, profitable business that you will look forward to working in and on, long after the honeymoon period.

What’s Next?

Okay, so your Energy Bar business is starting to look like a high potential opportunity “on paper”.

What’s the next step?

Now, it’s time to see if you can make this work in the real world. That’s what the the rest of Phase 1 is all about.

📍
In the upcoming modules we’ll walk through, step-by-step, the same process I use with my own clients to help them assess and develop their business idea until they're ready to make the ultimate Go/No-go decision to launch their business.

💡
In the end, it really comes down to “getting out of the office” and finding out if people actually want your product/service/solution and would be willing to pay for it (possibly even in advance).

⚡Action Step

Try to find a realistic scenario where you reach your target Net Profit (before taxes).

Use your Profit & Loss Sheet to modify your business model with new (rough) estimates of Sales and Costs.

Try increasing your price per sale (within a reasonable range) and think through how this would affect your costs.

Try increasing your sales volume and think through how this would affect your costs.

💡
Remember: Try to be conservative with your sales estimates and liberal with your costs estimates.

🗂️
Access our Profit & Loss Google Sheet at the bottom of this page in the ”Resources” section.

🗂️ Resources

💡
Scroll left-to-right across the table below to view all columns. Click on any item in the leftmost column to open that specific resource page.

🗂️
Resources Core Database

ItemTagsURLPriceDescription
Profit & Loss Sheet
Napkin MathFinancialsBizActually
Free
A simple Profit & Loss Google Sheet to test alternative business models fast! (Created by our Team)

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❇️
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