The University of Chicago

Graduate School of Business

Final Project – Business Plan

Bus 484-81
Prof. Robert J. Calvin
New Enterprise & Small Business Management Sacha Stawski

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Sacha Stawski E-Mail: [email protected]
Bus484-81 Tel. (312) 559-0756

Introduction / Executive Summary

According to Costwatch Consulting Group: "There are more than 1,000 long distance providers. AT&T, MCI
and Sprint have over 300 different rate plans. Costs for the same call can vary by as much as 400%!"

TollSaver is seeking $750,000 from outside investors in return for 45% of the company. TollSaver’s strategic goal is

to revolutionize the way customers choose their long distance carrier (& verify their phonebills) through a new

software/hardware solution (new technology). TollSaver wants to be for the telecommunications industry what “Sabre” was

for the airline/reservation industry. It will be a valuable tool not only in terms of tracking existing telephone calls, but also in

finding the best provider given automatically monitored call patterns, etc.. The initial target market is small business and

residential customers with long distance phonebills of $200 or more (especially international callers). While TollSaver

expects to patent its technology, there is concern about the long term defensibility and sustainability of a technological lead.

TollSaver expects to compensate losses to competitors through the introduction of new products and services, and key

partnerships with telecommunication consultants and long distance providers, among others, to strengthen its lead in this area.

Long term, TollSaver is also planning to use its technology to expand into other telecommunication market segments, where

billing verification and comparisons may be useful, such as calling cards, internet services, etc.. (Down the road, the

technology may also be applied to other industries, such as cable TV, gas, electricity, etc., which will become more important

as these industries gain competition through deregulation and other means). The management team will be ideally equipped to

lead TollSaver into the 21st century. Besides personal experience in telecommunications, it has a wide range of abilities in

management, marketing, sales, research, technology, manufacturing, and small enterprise operations.

Background – targeting a niche in an ever growing market

There are over one thousand long distance providers in the US (and increasingly so in other parts of the world). Each

in turn has hundreds of different calling plans, price discriminating users on their calling pattern. Some of the typical plans

target business or residential users, domestic or international callers, in addition to the typical day, evening, and weekend time

slots. Furthermore, frequent billing errors are common, especially as average monthly call volume rises. Billing errors in turn

are hard to track (unless manually going through bill), and even if errors are found, there is often no way to prove these.

Automatically analyzing call patterns, based on usage, such as in the form of a call monitoring system, are not usually geared

towards small business or residential customers, and none of the existing systems link call patterns with rate plans. Ultimately,

there is no “neutral / unbiased” source of verifying the most inexpensive provider (based on call patterns), and existing system

are simply inconvenient, inefficient, filled with inaccuracies, and totally user-unfriendly. Thus, small businesses, international

callers, and volume domestic callers represent the most underserved segments, and in turn the target segments for TollSaver.

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Sacha Stawski E-Mail: [email protected]
Bus484-81 Tel. (312) 559-0756

TollSaver – The Product1 - Features/Benefits, Costs, Staffing, Pricing and more

TollSaver combines two major activities for customers.. TollSaver will have a hardware device, which will be hooked

up to your telephone and automatically track all outgoing telephone calls. The collected information can be used to create

multiple reports. The hardware device can either be immediately connected to a computer, or be attached a later point to

automatically upload all tracked call information. In addition, TollSaver will have a software solution, which will allow

customers to firstly create all sorts of call reports, using the tracked confirmation. More importantly, the software will also

match the collected call information and patterns against stored telephone rate information from different companies to

identify the least expensive provider. (Automatic rate updates will be available for download on a monthly basis).

Initial Start-up costs will include $100,000 to develop software, $50,000 to develop product, $50,000 to produce the

first 1000 units and run a limited test market, prior to Q.1. In terms of periodic direct costs / variable costs, it is anticipated

that material and miscellaneous will cost $30 per unit ($19 hardware + $11 software, as broken down in the schematic chart,

in the Appendix). We are looking to outsource/subcontract production to a lower cost manufacturer within 1 year, though,

thus $30 being a fairly conservative estimate. Additional costs include labor of $2 per unit, sales commission of 5% of

revenue, and sales support of 3% of revenue. In terms of periodic fixed costs 14 researchers will be hired to gather

information on call plans and prices, 2 researchers for product development, as well as 3 managers (sales, marketing and

operations). In terms of advertising, costs of $500,000 per year are anticipated and planned for. Lastly, there will be other

supplementary costs associated with facilities, web site maintenance, patenting, trademarking, administration, etc..

Sales, Market Projections, Financing, Pricing & Future Options (Including product development and exit)

As far as sales are concerned, this is a growing market. In addition, as mentioned above residential and private

customers are under-served, i.e. their needs not being met by the long distance providers. Annual sales are estimated to be

around $12 million, with 3% penetration of small business segment, as well as 3% penetration of the household segment. This

forecast does not include additional product lines that are expected to be launched in years2 and 3, based on the same

technology. It also does not include an anticipated industry adaptation making this technology into a commodity product

comparable to “Sabre” for the airline industry. Based on these relatively conservative estimates, a gross margin of 42.8%, and

a net margin of 18+% are forecasted, as outlined in the financial data included in the Appendix.

Initial financing of $100,000 is being provided through the founding management team of four University of

Chicago MBA students. The funds stem from personal savings, and funds raised through home loans, bank overdraft/credit

lines, family, and friends. An additional $750,000 are being sought from outside investors in return for 45% of the company.

The company will also look into small business grants, loans, special government funding and other sources, if necessary.

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See Appendix for detailed product flow-chart, outlining product/user set-up, as well a another chart showing breakdown of component costs
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Sacha Stawski E-Mail: [email protected]
Bus484-81 Tel. (312) 559-0756

In terms of a long run exit strategy, or future potential, there are a lot of options. TollSaver could opt to merge with

another software company; it could license its technology to outside consulting firms, or even sell-out to a major

telecommunication provider (who wants imperfect information). Additionally, TollSaver might launch other products (expand

the product line), or it may be even go public.

Future Features might include an increased breadth of rate information for smaller long distance retailers. Again,

other “spin-off” products may also be launched for other markets, where rate comparisons may be useful. Using the Internet

as an initial sales medium, combined with the utilization of domestic partnerships with international corporations, the

company might also expand internationally, e.g. through a package comparing rates for different Callback providers.

Additionally, TollSaver might set up sales/commission contracts with telecommunication providers, as another retail outlet.

The management team is also looking into allow automatic long distance provider switching through its software and web

site. While this would guarantee the company referral commissions from long distance companies, it might jeopardize its

“neutrality” in the eyes of the customers. The options will be carefully studied. TollSaver will also continue to work on

product updates, to incorporate market changes, such as finding ways to take advantage of phone companies posting bills

online in the future. One such update may include an “online reader” feature, which will automatically “read” these bills and

verify them automatically against information stored in TollSaver. Furthermore, the company is ideally set up to monitor calls

made through Internet Telephony (telephone calls made via the Internet), which TollSaver will be able to monitor, too.

The company will pursue perceived value pricing. Assuming a very conservative average phone bill of $100 every

month, or $1,200 per year, a consumer is typically over-spending by at least 10%. Based on this the total loss is $120 per year

due to over-billing and/or lack of knowledge about lower cost calling plans. At a price of $65, TollSaver thus pays for itself.

Marketing and Distribution Strategies

In regards to promotion TollSaver will engage in advertising, including magazines (Inc., Entrepreneur, Ethnic /

International Community Publications), direct mail / direct e-mail to address lists obtained through small business agencies

and organizations. The company will also pursue alliances, co-branding and corporate sponsorships, such as from Intuit

QuickBooks, Peachtree Office Accounting, or other small business accounting packages, etc.. It will also look to work closely

with or through financial institutions that make small business loans and other organizations, companies and publications

serving the small business segment. In addition, the company will pursue active web advertising on consumer and small

business oriented web sites, telecommunication web sites, and more.

Sales and product placement will be pursued through direct sales, phone orders (1-800-TollSaver), a web store front

(www.TollSaver.com), trade shows, specialty stores/catalogs (e.g. Hello Direct) and download sites, as well as outside agents.

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Sacha Stawski E-Mail: [email protected]
Bus484-81 Tel. (312) 559-0756

Management

The TollSaver management team is made up of four MBA students from the University of Chicago. They share a

unique combination of sales, marketing, and technology related backgrounds, among other things. There are 15 years of

software experience; 5 years of digital communications hardware experience; 1 year of telecommunications experience; 5

years of international sales and marketing experience; 5 years of management and operations expertise; 2 years of small-

enterprise management experience; 2 previous start-up experiences; as well as 3 years of Internet commerce, advertising, and

direct-email experience. Furthermore, the management team has access to contacts and advice from consultants,

telecommunication insiders, ad-agencies and more.

Competition, Barriers to Entry & Risks

Potential competition may come from existing and future software / hardware providers, who currently only serve
telecommunication firms and large business customers. Ultimately, their infrastructure is not set up to deal with individual
private customers, or small business sales. These are generally companies who provide a solution for companies to track all
outgoing calls and offer the option to generate all sorts of various reports. None of them provide extensive rate comparisons.
Other potential entrants may include companies who provide call management accounting software packages, or specialty
telephone product related companies, such as HelloDirect. This may be partially overcome through strategic partnerships,
licensing of the technology and barriers to entry. Potential barriers to entry relate to speed to market, technological know-
how, patents/trademarks (though virtually impossible to defend), and very importantly strategic partnerships.

Agents:
Consultants who analyze bills and make suggestions
FoneSaver ($30)
Unitel (per assignment basis)
Websites that offer online rate comparisons & ability to switch to one of their partner carriers
These do not, however, look at individual call patterns
Smaller long-distance providers who offer customers the option to fax in their phone bills for a rate comparison

Plan Data Providers:

Web sites that provide call plan information
They do not analyze your bill

Summary:
What is the essence?
Innovation & New Technology
(Image Marketing)

Why do people buy?

Comfort in knowing they are not getting ripped off by phone companies
Phone bill monitoring at anytime
Time & cost savings as a result of identification of optimal long distance provider given individual call patterns
Least expensive possible phone bills for volume and international callers
Monthly (free) updates of new & additional calling plans

What is ROI vs. Risk

Expected IRR is 57% in real terms (60% in nominal terms)
Risk: above average
Being lessened for through a limited test market prior to Q.1
Risk being spread through aggressive product development & product portfolio diversification
New Technology, patents & trademarks will have a resale value

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 Internet
CONCEPT www.TollSaver.com Telephone
SUMMARY: Company
Phone Plans and Prices

Software
Uploader Info Tracked
Verifier Phone # Called
Call Optimizer Start Time / Date
End Time / Date

Fax

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 Can check phone expenses anytime,
instead of just once a month!!!

Today’s date: 12/4/98

SAMPLE Verification Report Last upload: 12/4/98
(Query: items since 12/1/98)

Phone Called Location Date Time Duration $ Amount Plan

Source Phone: (312) 555-1111
(612) 383-2929 Washington D.C. 12/01/1998 3:30pm 56 min $8.96 MCI Residential (weekend)
(721) 833-1929 Tulip, AR 12/02/1998 11:21am 30 min $2.40 10-10321 (weekend)
9663-878-5181 Unock, Madagascar 12/03/1998 2:33pm 1 hr 30 min $97.20 MCI Residential (day)
(838) 837-1827 Anaheim, CA 12/04/1998 9:30am 45 min $2.40 1-800-Call-AT&T (evening)
$2.40

Taxes and Additional Charges

Plan Description $ Amount

10-10056 State Infrastructure Maintenance Fee $0.01
Municipal infrastructure Maintenance Fee $0.02
Federal at 3% $0.03
Illinois at 7% $0.08
Municipal at 5% $0.05
$0.19

MCI Residential Domestic Toll Free $0.58

Domestic Outbound $2.35
International Outbound $4.03
International Calling Plan $3.00
$9.96 (cont'd)

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 The Call Optimizer…
On initial install of TollSaver software
• Survey wizard determines expected calling pattern
Software • Recommends base calling plan

Uploader Optional - Before making call

Verifier • Prompts caller for out-going number
Call Optimizer • Recommends least expensive plan
• Auto-dial

After history of calls

• AI module constantly scans for “core” pattern
• Recommends new base calling plan
Call Optimizer is updated once a month
via a free downloadable upgrade with
new calling plans and prices

(The top 4 long distance companies share 85%

revenue market share. Thus TollSaver may initially
provide rate comparisons for the top 20 providers,
looking to include rate information about additional
carriers constantly.)

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 Total Cost of Hardware Components: $19
(+ Software Approximately: $11)

$5 $5

$1 Logic Board Memory

$2 Serial
Interface

Phone Jack
Interface Battery
$1 Supply
$1

$3
Enclosure
$1

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 How did I compute 9,500
per quarter unit sales to
1992 Economic Census -- Enterprise Statistics
Geography: United States small businesses?
Industry (SIC): All industries

Receipt size No. Estab Employees

$5 million or more - -
$2.5 to $4.9 million 249,757 5,943,957
$1 to $2.49 million 520,426 8,115,675
$500 to $999 thousand 629,549 5,884,840
$250 to $499 thousand 869,124 4,966,631
$100 to $249 thousand 1,196,681 3,890,235
Less than $100 thousand 1,175,653 1,915,081
4,641,190 30,716,419

Source: U.S. Bureau of the Census

Number employees per unit: 5
# Target consumer group units: ########

Penetration: 3%
Years turnover of businesses: 5

Annual sales (1992) 36,860

Quarterly sales (1992) 9,215

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 Years 1 & 2
(Dollar values expressed in real terms)

Yr1, Qtr 1 Yr1, Qtr 2 Yr1, Qtr 3 Yr1, Qtr 4 Yr2, Qtr 1 Yr2, Qtr 2 Yr2, Qtr 3 Yr2, Qtr 4

Price $65 $65 $65 $65 $65 $65 $65 $65

Units sold
Small businesses - 500 925 1,711 3,166 5,857 10,835 15,000
Household consumers - 300 555 1,027 1,899 3,514 6,501 12,027
Total - 800 1,480 2,738 5,065 9,371 17,336 27,027

Revenue - 52,000 96,200 177,970 329,245 609,102 1,126,839 1,756,745

Variable Costs Per Unit

Direct material $30 - (24,000) (44,400) (82,140) (151,959) (281,124) (520,080) (810,805)
Direct labor $2 - (1,600) (2,960) (5,476) (10,131) (18,742) (34,672) (54,054)
Sales commission 5% - (2,600) (4,810) (8,899) (16,462) (30,455) (56,342) (87,837)
Sales support 3% - (1,560) (2,886) (5,339) (9,877) (18,273) (33,805) (52,702)
- (29,760) (55,056) (101,854) (188,429) (348,594) (644,899) (1,005,399)

Gross Profit - 22,240 41,144 76,116 140,815 260,508 481,941 751,346

Gross Profit % n/a 42.8% 42.8% 42.8% 42.8% 42.8% 42.8% 42.8%

OH Costs
Researchers (price plans) 14 (105,000) (105,000) (105,000) (105,000) (105,000) (105,000) (105,000) (105,000)
Research (for product development) 2 (150,000) (26,250) (26,250) (26,250) (26,250) (26,250) (26,250) (26,250)
Management Salaries 3 (45,000) (45,000) (45,000) (45,000) (45,000) (45,000) (45,000) (45,000)
Advertising - (125,000) (125,000) (125,000) (125,000) (125,000) (125,000) (125,000)
Office, warehouse leases (15,000) (15,000) (15,000) (15,000) (15,000) (15,000) (15,000) (15,000)
Web site hosting costs (2,500) (2,500) (2,500) (2,500) (2,500) (2,500) (2,500) (2,500)
Administration (25,000) (25,000) (25,000) (25,000) (25,000) (25,000) (25,000) (25,000)
Total (342,500) (343,750) (343,750) (343,750) (343,750) (343,750) (343,750) (343,750)

Operating Profit (342,500) (321,510) (302,606) (267,634) (202,935) (83,242) 138,191 407,596
Interest - - - - - - - -
Taxes 34% 116,450 109,313 102,886 90,995 68,998 28,302 (46,985) (138,583)

Net Profit (226,050) (212,197) (199,720) (176,638) (133,937) (54,939) 91,206 269,014
IRR (real): 57%
IRR (nominal): 60%

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 Years 3 & 4
(Dollar values expressed in real terms)

Yr3, Qtr 1 Yr3, Qtr 2 Yr3, Qtr 3 Yr3, Qtr 4 Yr4, Qtr 1 Yr4, Qtr 2 Yr4, Qtr 3 Yr4, Qtr 4

Price $65 $65 $65 $65 $65 $65 $65 $65

Units sold
Small businesses 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000
Household consumers 18,877 34,922 45,000 45,000 45,000 45,000 45,000 $45,000
Total 33,877 49,922 60,000 60,000 60,000 60,000 60,000 60,000

Revenue 2,201,991 3,244,933 3,900,000 3,900,000 3,900,000 3,900,000 3,900,000 3,900,000

Variable Costs Per Unit

Direct material $30 (1,016,304) (1,497,662) (1,800,000) (1,800,000) (1,800,000) (1,800,000) (1,800,000) (1,800,000)
Direct labor $2 (67,754) (99,844) (120,000) (120,000) (120,000) (120,000) (120,000) (120,000)
Sales commission 5% (110,100) (162,247) (195,000) (195,000) (195,000) (195,000) (195,000) (195,000)
Sales support 3% (66,060) (97,348) (117,000) (117,000) (117,000) (117,000) (117,000) (117,000)
(1,260,216) (1,857,100) (2,232,000) (2,232,000) (2,232,000) (2,232,000) (2,232,000) (2,232,000)

Gross Profit 941,775 1,387,833 1,668,000 1,668,000 1,668,000 1,668,000 1,668,000 1,668,000
Gross Profit % 42.8% 42.8% 42.8% 42.8% 42.8% 42.8% 42.8% 42.8%

OH Costs
Researchers (price plans) 14 (105,000) (105,000) (105,000) (105,000) (105,000) (105,000) (105,000) (105,000)
Research (for product development) 2 (26,250) (26,250) (26,250) (26,250) (26,250) (26,250) (26,250) (26,250)
Management Salaries 3 (45,000) (45,000) (45,000) (45,000) (45,000) (45,000) (45,000) (45,000)
Advertising (125,000) (125,000) (125,000) (125,000) (125,000) (125,000) (125,000) (125,000)
Office, warehouse leases (15,000) (15,000) (15,000) (15,000) (15,000) (15,000) (15,000) (15,000)
Web site hosting costs (2,500) (2,500) (2,500) (2,500) (2,500) (2,500) (2,500) (2,500)
Administration (25,000) (25,000) (25,000) (25,000) (25,000) (25,000) (25,000) (25,000)
Total (343,750) (343,750) (343,750) (343,750) (343,750) (343,750) (343,750) (343,750)

Operating Profit 598,025 1,044,083 1,324,250 1,324,250 1,324,250 1,324,250 1,324,250 1,324,250
Interest - - - - - - - -
Taxes 34% (203,328) (354,988) (450,245) (450,245) (450,245) (450,245) (450,245) (450,245)

Net Profit 394,696 689,095 874,005 874,005 874,005 874,005 874,005 874,005
IRR (real): 57%
IRR (nominal): 60%

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