Model 5: Description of agriproducts or services

Learning objectives
Participants will gain attention on the importance of:

 Focus on product
 Elevator pitch
 Cost evaluation
 Customer satisfaction

Contents
5.1 The exact product / line of goods
5.2 Estimate of Costs
5.3 Contribution margin
5.4 Pricing
5.5 Target Group Demand
5.6 Distribution
5.7 Customers’ Purchasing Behavior
5.8 Competitors

The product or service you offer is the lifeblood of a new business. Thus, it is important to analyze
its various aspects before deciding the business model.

In this part of the business plan you must:

 Verify that you have sufficient knowledge about your product or service

 Convince the reader that you know all about your product

The analysis of your product must convince the critical reader and yourself that you really know
your product or service and how it helps the customer.

If you can show the product in a picture, illustration or in real life, it will help your presentation.

1
Business plan questions
Below you’ll find the issues that the business plan template asks questions about.

Elevator pitch
One of the reasons why it sometimes is difficult to explain what you are selling is that you are not
quite sure what you are selling.

Of course, in broad terms, you know, but not specifically. To resolve this, formulate a short speech -
an elevator pitch - you will give to a person in an elevator who asks: What are you selling? You
have only the 5 seconds it takes to reach third floor.

Read module 3 for more information about the elevator pitch.

5.1 The exact product / line of goods

Let’s go in detail and specify clearly which product or which services you actually sell.

For example, if you want to sell dried organic pepper it can be split up in these categories:

 Black pepper beans 100 g

 Black pepper beans 500 g

 White pepper beans 100 g

 White pepper beans 500 g

 White pepper beans 1000 g

 Black pepper – semi crushed 100 g

 Black pepper – powder 100 g Picture 1: White pepper beans. Pic: Pixabay.com

 White pepper semi crushed 100 g

 White pepper powder 100 g

5.2 Estimate of Costs

To be able to estimate if you will be able to make money from your business, you must find out
what the customer is willing to pay for the service or product you offer.

You also need to find out how much the product will cost you to purchase, produce or import.

The difference between the two amounts shows how much money you will have left to pay your
rent, telephone, internet access, marketing and your own salary (or the profit of firm).

2
Example
If you online sell organic pepper in 500 g package to overseas customers at 25 $ your calculation
could look like this:

Sales price white pepper 500 g 25.00 $

- Production cost - 2.00 $
- Packaging for export - 1.00 $
- Postage to Europe - 5.00 $
= Contribution margin: = 17.00 $

5.3 Contribution margin

This calculation shows you that each time you sell 500 g white pepper at $25. You will have $17
left. This has to cover expenses other than those related directly to purchasing, transport dispatching
the pepper.

This amount is called contribution margin or gross profit.

You can also calculate a percentage, which is then called the contribution ratio. It is done like this:

 Contribution margin x 100 / sales price

In the above white pepper example, the contribution ratio is:

 17 $ x 100 / 25 $ = 68 %

The contribution margin differs substantially between different trades and customer segment. If you
sell the pepper to a local wholesale the sales price would be lower. The calculation might look like
this:

Sales price white pepper 500 g 8.00 $

- Production cost - 2.00 $
- Packaging - 1.00 $
- Transport - 1.00 $
= Contribution margin: = 4.00 $

In the above white pepper example, the contribution ratio is:

 4 $ x 100 / 8 $ = 50 %

The two contribution ratios are close (50 and 68) but note that the contribution margin is very
different (17 $ compared to 4 $) per sale of 500 g white pepper.

Expenses
Before your product/service reaches the customer, a number of cost accumulating activities have
taken place – activities such as:

3
 1. Purchase of goods
2. Cost of sales (e.g. plastic bags, wrapping paper etc.)
3. Raw material such as seeds, fertilizer, etc.
4. Wages
5. Freight, import / export duty

Once you have determined your expenses, you can apply a 'breakeven price' on your
product/service. Add your required profit and you have a sales price. Do not forget to add VAT or
other expenses demanded by the state if it is obligatory in your country.

The calculation could look like this:

Cost price /raw material 50

+ Cost of production 15
+ Profit 70
= Your sales price 135
+ Sales tax, VAT or other Governmental taxes
= Customers purchase price

5.4 Pricing
Eventually, an independent business owner must price his/her product/service. To many this is
unexplored territory. However, it does not have to cause too much trouble. You just need to be
aware of a few conditions.

 Market mechanisms allow you to put a high price on your product/service if there is a great
demand and a poor supply. (E.g. the price of pepper to overseas customers)

 Oppositely, if there is a poor demand and a surplus of similar products/services in the

market you may be forced to apply a low price. (E.g. the price of pepper to local
wholesalers)

Price is only one of many competitive parameters. You should also pay attention to a number of
other conditions: service, quality, close to market, prestige, ‘the good story’ etc.

5.5 Target Group Demand

Your target group conditions also influence the pricing:

 What are the customer’s requirements, buying motives, and expendable capital?

 Season, trend, fashion

 The customer’s price expectations – psychological price, corporate image, price and quality,
etc.

4
Put yourself in the customer’s place, and then fix the price. During periods of low consumer
expenditure, it may matter whether your product/service is a necessity or a luxury item.

Market Structure
Depending on the competitive situation in your market you must at least investigate the following:

 The general price level of the product/service

 Are the competitors campaigning on price?

 Which other competitive parameters apply?

Inter-changeability
If price is the most important parameter, then you must consider if other products/services are inter-
changeable with yours. If you sell takeaway spring rolls and your neighbor sells hamburgers then
these products are inter-changeable. The customer’s hunger will be satisfied from both products.

The higher the inter-changeability, the more the customer gains from purchasing the cheapest
product/service.

Supplier
Some businesses have an extensive network of suppliers around the world. Others have none
because they are their own supplier. Do you have a product that requires goods delivered by
specific suppliers? You should state this in the business plan.

The supplier could have a big influence on the performance of your company. What happens if they
go bankrupt or their quality goes down? Can you find other suppliers to fill the gap?

Stock
You have to consider how much stock is needed in your
company. The ideal situation is that you always have the item
your customer wants to buy in stock. On the other hand it is also
very expensive to have too much in stock.

Maybe the fashion changes and customers like the color red but
you only have green in your stock. That is simply bad luck and
your red items in stock are worth nothing.

A general rule is that 20% of a business’s products generate

80% of its income. Try to locate the 80% of the products that
generate only a little income and eliminate them from the
product line. This might minimize the need for a large stock.
Maybe you could make a deal with your supplier that they only Pic 2. Woodcraft from Sri Lanka.
deliver products exactly when the customer wants them. This is Source: Writers own
called just-in-time management.

5
5.6 Distribution
To many companies distribution of products/services is a big problem. If you want to sell directly to
the consumers it is often hard to find qualified sales channels.

Selling to Private Consumers

Picture yourself having a chicken farm producing 100 chickens a week. What is the best way selling
them?

You will properly get the best price per sold chicken if they are sold to a private consumer. But
what is the cost of selling to private customers? E.g.:

 Transport to market – 20 chickens every day

 Rent of a market stand

 Workers selling chickens

 Risk of bringing home diseases

 Theft from market stands

Selling to other companies

If you instead of selling to private customers found other companies –hotels or restaurant owners
each are purchasing 20 chickens a day? Would it be a better way of distributing your production of
chickens?

With larger customers you might develop new business opportunities. E.g. hotels might prefer to
get “ready to cook” chickens and of course pay extra for this service.

5.7 Customers’ Purchasing Behavior

Before settling for a specific distributive system you must understand your customers’ buying
habits. You can ask your customer: “What, where, how and when do you purchase goods?”.

The customer most likely makes demands on:

 Purchase volume – is the customer ordering 1,000 units or single unit?

 Delivery lead time – does the customer want the order right now or will s/he be able to wait
for 30 days?

 Geographic logistics – will a central distributor do or must you have distributors spread
throughout the market?

 Product diversity – does the customer require multiple product diversity or will a standard
product be enough?

6
  Additional services – Does the customer value other issues such as guarantee, free delivery,
credit extension, etc.?

Choosing Distributive System

Many people want to sell their product/service directly to their customers. In doing so, you score the
full profit yourself without having to split it between one or more intermediaries.

There is a tendency towards direct sales to consumers, but to a newly established company a hook-
up with one or more distributors could be a wise decision.

A distributor/liaison can take some costly tasks off your shoulders. An example:

 Collecting market data

 Marketing

 Negotiation

 Order book

 Financing

 Transfer of risk

 Warehousing

 Payments

 Carriage to customers

Having analyzed your customers’ purchasing behavior and the pros and cons of using a distributor
you are now ready to choose the ideal distribution system for you and your customers.

Which distribution channel is the best for you?

5.8 Competitors
You are practically never alone in the market you want to operate in. There will always be one or
more companies providing a similar service or product meeting the same demand as yours.

Know your competitors – even better than they do themselves.

First, identify them, and then find out as much information about them as possible.

 How many are they?

 How widespread are they - geographically?

 What is their staffing level?

7
  What services do they offer?

 What is their price level?

 How is their quality?

 What are their weaknesses, if any?

 What is their image among their customers?

You can get such information in many ways. You can call a rival company and request brochures,
find them on the internet, visit the shop, seek information at the library, buy their products,
interview people who have bought rival products, etc.

If there are too many competitors for you to know them each individually, you must determine the
total number of competitors and try to pinpoint the ones presenting the biggest threat to your own
existence.

Cooperation
Often, it can be worthwhile considering your competitors as your colleagues or collaborators.

If the market for your service is sufficiently wide or has the potential of expansion, then all parties
would benefit from cooperation. If you get an order too big for you to handle on your own, two
competitors/colleagues may come in handy and help fulfilling the requirement.

Potential for development

Most products have a certain life span on the market. It can be long or short depending on product
or service. Also developments in society and in technology will have influence on the life span.

The life span can be divided into four periods:

1. Pioneer – it is brand new, few people know of it and it is difficult to sell

2. Star – now people know of it and would like to have one – maybe it is a bit expensive

3. Cash cow – the product is now mainstream and you can ‘milk the cow’

4. Fading star – too many have tried it and a new star is on its way up

This life span counts for most products and services.

Where is your new business in the life span? If it is a fading star from the start, then you should
certainly find ways to convert it into a “star”.

8
9